When parties are going through a divorce, they are very often concerned about the financial impact of the divorce process, as well as what their financial picture might look like following the entry of a divorce. This is especially true for high-earning executives who may need to pay alimony and child support to their spouse.
Executives often receive compensation packages that consist of not only salary but also additional benefits like cash bonuses, restricted stock, performance shares and stock options. All income must be included when calculating child support for the children. For cash bonuses, the parties may elect to have the bonus included as income and put directly into the child support calculation. However, this may not always be the best way to handle a cash bonus in the context of child support because the child support guidelines are structured in such a way to “max out” when the parties’ combined net incomes exceeds $3,600 per week. If your combined net income exceeds $3,600 per week, it may be more appropriate to utilize just the parent’s respective salaries in calculating child support, and then include a separate provision that a certain percentage of the bonus received by the parent who pays child support shall be paid to the supported spouse in addition to the basic child support amount. This will ensure that the children continue to benefit from all of the income sources of the parents which is what the child support guidelines seek to ensure.
Bonuses should also be considered when determining an appropriate amount of alimony. As with child support, this is often handled by the parties reaching an agreement distributing a percentage share of the bonus to the dependent spouse in addition to alimony calculated on the wage earner’s base pay. Generally, parties agree that this will be paid in a lump sum within a certain number of days following the receipt of the bonus.
Many executives also receive stock options or restricted stock units as part of their executive compensation package. As stock is subject to equitable distribution, they must be divided in a divorce. In some instances, the party who owns the stock may have the ability to transfer the vested stock to the other party’s name. If this is possible, it may be preferable to do it in this manner as it gives the other party the ability to manage the stocks themselves. Some parties may decide to liquidate the investment accounts and share the cash proceeds in some way.
When an employer provides an employee with stock options, we will use “Callahan” trust language to secure the non-employee’s interest in the options after divorce. Callahan is the name of the court case that created this method of distributing stock options so we call it a “Callahan” trust. The trust language will be included in your marital settlement agreement and spell out exactly what options are in existence and the rights of both parties to the respective options. It will also provide that the employee-spouse is responsible for exercising the non-employee’s share of the options at the direction of that party. Because the options will still be in the original owner’s name, the tax consequences of exercising the options will appear on the employee’s tax return. Therefore, in order to ensure that the non-employee is responsible for the tax consequences, the employee will have to work with their accountant to determine to correct amount of taxes to withhold, and will withhold that amount from the proceeds from the sale of the stock options prior to providing the other party with the net proceeds.
At DeTorres & DeGeorge, we have extensive experience in handling executive compensation packages. If you have questions regarding the best way to distribute these assets in your divorce, contact us today to schedule a consultation at 908–284–6005 or 973–264–4100.