Division of Executive Compensation
Stock Grants, Restricted Stock Units, Restricted Stock Awards, Stock Options, Valuing Privately Held Stock, and Deferred Stock Compensation.
High level executives often receive stock as part of their total compensation package. These awards may be future oriented, rewards for past services, or a combination of the two. In your divorce, these awards will be divided in some measure as property and future awards will be considered as part of your maintenance and child support package. There are many factors to consider for potential buy-out options and tax effects that you should discuss with your attorney and accountant when considering settlement or pursuing litigation to preserve your rights. Your attorneys at Feinberg Sharma are experienced in advanced discovery tactics to ensure your full “share” of the assets will be disclosed, or discovered and distributed, on a knowing tax-fair basis.
Stock compensation varies widely and may be awarded in conjunction with other deferred compensation, equity options or retirement benefits. Always consult with an attorney and your accountant to make sure you are aware of the variety of tax consequences and settlement options attendant to these awards. You may have the option to “trade” the stock for another marital asset immediately, or wait for stock to vest and mature, when you can sell or hold it as you see fit. The basis of the stock and the type of award is crucial to making a smart, tax-informed decision about exercising your options, and will depend on a variety of factors, including any “black out” dates when trades may not occur.
Unrestricted Stock Grants: An Unrestricted Stock Grant is an award of a certain number of shares in a company. These shares are taxed at face value as ordinary income at the time the shares are awarded to the employee. You may decide to wait to exercise these shares believing the value will rise, in which case the gains may be taxed at a more favorable rate in the future.
Restricted Stock Awards: Restricted Stock Awards are granted shares that contain certain restrictions on when they can be exercised. Depending on the terms of the restrictions, you may have the opportunity to elect to be taxed at the time of grant, or at the time the restrictions lapse, when the stock “vests”. If you are undergoing a divorce, the potential tax burden must be considered.
Restricted Stock Units: A Restricted Stock Unit is a right to receive stock in the future, after time limitations have passed. The employer’s plan will set forth guidelines on transferability and whether stock or cash may be elected. These provisions are crucial to the value and after review of the plan documents, your attorney will be able to explain options for dealing with this type of deferred compensation.
Deferred Stock: Deferred Stock is similar to a Stock Grant, except that the shares are of a subordinate class of shares and may not have voting or dividend rights until a date in the future. This may have an impact on the shares’ present or future value, depending on the conditions imposed.
Stock Options: Stock Options are a right to purchase shares of a company at a certain price at a future date, typically lower than market value, resulting in a net gain when the shares are later sold at the higher price (sometimes immediately). Options typically have very specific windows of time when they must be exercised. If your spouse fails to exercise upon your instructions, you may need to bring this to the Court’s attention. “Qualified” options have the best tax treatment available, meaning they are taxed upon sale of the stock, as opposed to “non-qualified” options which are taxed upon exercise.
Transferability and Divisibility of Stock and Stock Options: Often, stock restricted by time or performance-based requirements may not be divisible until it vests, or when all of the restrictions imposed upon it lapse. In this case, there are options for a buy-out of the stock based on other available marital assets, or for the shares to be held in a constructive trust by the employee spouse for the benefit of the recipient spouse.
Unknown Value – Privately Held Stock: Stock that is not publicly traded often lacks an easily ascertainable value and will likely require an expert witness to develop the value of the company. Whether or not a formal valuation is a cost-beneficial option will depend on a number of factors, including the ability to sell and transfer the stock. Minority interests in businesses will find the stock values are quite lower than majority interests.
New forms of deferred compensation are always being “invented” by employers. As changes occur and new forms of compensation are awarded, FS will be there to guide you.
Whether you are entitled to receive stock by virtue of employment or dissolution of marriage, you may have concerns about the divisibility, value and tax consequences relating to stock or other forms of deferred award as a component of compensation. The experienced team at Feinberg Sharma is well versed in complex financial compensation and will ensure your marital settlement agreement is crafted to include such considerations.
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For help with the division of executive compensation as a part of high-asset property division, contact Feinberg Sharma at 312-376-8860, or email us at firstname.lastname@example.org.
© Jessica L. Nelson for Feinberg Sharma, P.C.