How to Handle Equity Compensation & Deferred Compensation in Divorce
Since most states like Georgia are “equitable distribution states,” all assets acquired within the marriage, including all forms of compensation from an employer, are subject to division if the marriage falls apart. Suppose you are facing a divorce and your marital property includes earnings from equity compensation or deferred compensation. In that case, it’s wise to know how the courts divide these properties for clarity moving forward.
Equity compensation is additional compensation from an employer that can take the form of:
- Incentive stock options
- Restricted stock units
- Employee stock purchasing plans
In the event of divorce, the court must work to fairly divide all forms of equity compensation that have been earned between marriage and separation.
Dividing Equity Compensation
Because the value of stock options and stock units are not always fixed and are often obtainable at a future time, the valuation and division process can become complex. The courts must determine if the equity compensation is separate or marital property or if it is vested or nonvested. They will also assign value to the qualifying options.
Valuing methods can include:
Intrinsic Value Method – Value is calculated by subtracting the option strike price from the value of the current stock price. The figure is then multiplied by the number of stock options owned by the spouse.
Black-Sholes Model – A forensic accountant analyzes the stock option(s), looking at historical stock prices, strike price, and the vesting schedule to create a theoretical value estimate based on their findings.
Spousal Agreements – Both spouses agree on a value figure for each stock option.
Deferred compensation is additional compensation paid out to the employee later, usually at the point of retirement. The two types of deferred compensation plans are non-qualified and qualified plans.
Non-qualified plan examples:
- Supplemental executive retirement plans
- Salary deferral agreements
- Bonus deferral plans
- Excess benefit plans
Qualified plan examples:
- 457 plans
Dividing Deferred Compensation
Like the process for equity compensation, the courts must know if the deferred compensation is marital property or separate and what is vested or nonvested. Through careful analysis, the courts will discover what is divisible and how to divide it.
Deferred Distribution – The receiving party can obtain the value of their share if and when the time comes to exercise the stock options.
Present Valuation – The employee can agree to pay the receiving spouse the value of their share at the time of divorce. They can provide monetary payment or an asset of equal value.
If you are facing a divorce with equity compensation or deferred compensation as part of your marital property, contact Rubin Family Law for expert guidance.
Our team understands the complicated specifics involved with property division, including all forms of equity compensation and deferred compensation. We will help you protect your belongings and receive fair treatment as your divorce proceeds. Schedule a consultation with us today: 770-670-7200