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How executive compensation can affect divorce

On Behalf of | Jul 21, 2022 | Family Law

High-asset divorces can be more complicated than those where Indiana couples have little accumulated wealth. One or both spouses may have executive compensation that may not have much worth at the time of the divorce but may be in the future.

What is executive compensation?

Executive compensation has become more common as companies become cash-strapped but want to retain their best talent. Stock options and restricted stock plans are examples of executive compensation. However, dividing the assets from these plans can become messy during a divorce. The key to dividing these assets with the least amount of animosity is understanding each type of financial holdings that you and your spouse may own.

Typical executive compensation includes stock options and restricted stock. Both have vesting periods, meaning the owner cannot exercise their right to the asset for a specified period, usually a minimum of five years. Let’s say your company gave you a stock option in 2017 at a price of $500 per share with a five-year vesting period. You would be able to buy that stock after your vested date in 2022 for the same $500 price per share, even if the price skyrockets to $4,300 per share. However, if you exercise the option because of your impending divorce, you could end up paying a lot in taxes. Restricted stock awards are similar, but you usually lose these assets if you leave the company before they’re vested.

The unique needs of valuing stock options and restricted awards in divorce

You won’t find a one-size-fits-all vesting schedule for executive compensation agreements. However, understanding how yours works can help you get the most out of it if you have to divide these assets in your divorce settlement. The different types of vesting can affect what is considered marital property and can make a difference in the amount of taxes you may have to pay.

Consider consulting a financial advisor to determine the best course for taking vested assets out of your company when divorce is imminent. These professionals can help you minimize your tax burden and help you get a fair settlement.