How to Divide Year End Bonus & Executive Compensation in Your Massachusetts Divorce

Are you facing a Massachusetts high-net worth divorce in the new year? If so you may be wondering how to divide those unexpected year-end windfalls that you or your spouse may have received through their executive position. The word “windfall” describes the bumper effect of high value executive compensation, but technically it’s misleading, as most year-end compensation is not random – it is often tied to someone’s performance at work, or it represents an incentive to keep highly valued employees at the company. The spouse who receives the bonus or stock options may think that the money doesn’t have to be divided in the divorce and is theirs alone, but this is usually not the case. Even if you have already separated by the end of year or already filed for divorce, if the executive compensation was tied to income in the year you were married, it may be marital property.

Dividing executive compensation in a high value divorce can be extremely tricky and you need an experienced Massachusetts divorce attorney to help you make sense of the process. The following are a few questions to get you started with an evaluation of the division of these assets:

Is the executive compensation transferable? Some compensation, such as stock options or restricted stock units, may not be transferable and you will likely have to arrange a buyout, or those funds will need to be liquidated by your spouse on your behalf at a date in the future when they are exercisable or when they vest. In order to do this you have to place a value on the compensation. With stock options and stock units this could be complex as the value of the asset is subject to the fluctuations of the market.

Does the bonus or stock options count as marital property? Was it awarded for past or future performance? Say one spouse has been working at the same company for several years and they are paid a bonus, awarded deferred compensation or stock options as a reward for their service to the company, this would count as marital property because the asset is awarded based on the employee’s work performance during the marriage. This makes it earned income for the purposes of marital property division. On the other hand, if a spouse got a new job in the previous year before the divorce and they are awarded an end of year incentive consisting of stock options, restricted stock units or another financial incentive, this compensation could be tied to future performance. Stock options and restricted stock units are subject to vesting schedules (the period before someone has the right to buy or sell their stock). These vesting schedules could span several years and are therefore subject to future performance. If the asset is subject to future work performance those unvested options or stock units may still be divisible in your divorce, but it will not be as simple as an equal division. The non-employee spouse’s share of each tranche of unvested stocks or RSU will decrease over time, and can be calculated using what is called the “Baccanti” analysis.

How will tax be factored into the division of executive compensation and bonuses? Executive compensation and bonuses may be subject to different tax rules. For example, if an employee’s stock options have “vested” this means they have the right to buy the stocks at the reduced price offered by the company as an incentive. However different employee compensation structures have different tax rules. Restricted stock units are usually taxed when they vest, while incentive stock options (ISOs) are subject to capital gains tax when they are sold. This means that calculating an equitable property division could be complex. Whichever spouse takes the tax hit when the assets are sold or bought is at the mercy of future changes in the market value of the asset. A regular employee bonus is taxed as income, but it may be withheld in different ways by the employer. It could increase your taxes but also deliver a hefty tax refund if the bonus boosts income and a greater amount is withheld. If the refund is issued the year after you divorce, it’s important to note that this is still marital property if the tax refund refers to a bonus earned during the marriage.

Dividing executive compensation is among the most complex aspects of your property division in a Massachusetts divorce. Reaching a fair settlement in a high value divorce that involves executive compensation requires the support of a highly experienced Massachusetts divorce attorney. If you are facing a New Year’s divorce, our Law Firm can help answer any niggling questions you may have about what you are entitled to and what you owe in your divorce. An end of year “windfall” might be a stroke of good fortune but it could introduce uncertainty. Please don’t hesitate to contact our divorce team to find out we can clarify your marital property division.