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Executive compensation and divorce

On Behalf of | Nov 12, 2023 | Family Law

Thousands of couples divorce yearly in Virginia, many of which involve a corporate executive or significant assets. These types of divorces are often messier and more complicated, as there’s more money, assets and property at stake.

For those at the C-level in the corporate world, executive compensation frequently is a significant portion of their net worth. And during a divorce, they represent an atypical asset class. Handling executive compensation in a divorce requires special planning.

The unique nature of executive compensation

The two most common forms of executive compensation are stock options and restricted stock. Stock options allow the holders to eventually purchase the company’s stock at an older (and hopefully lower) stock price, pocketing the difference between the older and current price. Restricted stock offerings grant the holder stock in the company but stipulate that they can’t sell it for a period of time.

In both cases, the key factor that makes executive compensation tricky in a divorce is the vesting period. During the vesting period, holders cannot cash in on their options or restricted stocks. And these assets generally can’t be transferred to another party, even during a divorce.

Handling executive compensation in a divorce

Assuming the divorcing parties can’t come to another agreement, you’ll likely have to place executive compensation into constructive trust so that the other partner is protected and has their fair share. Once the options or restricted stock vests, they can be sold and processed.

These types of executive compensation typically have a high tax burden, so you’ll want to be very careful in negotiating your divorce agreement so that the tax burden doesn’t fall unfairly on one party. And if your ex-spouse is an executive, remember that executive compensation typically isn’t on tax returns or paychecks. In a divorce, ensure you’ve properly investigated to discover any executive compensation you might not have been aware of.

Corporate compensation can be a tricky class of asset in a divorce. When it exists, you’ll need to take special care in crafting the financial settlement to handle its unique nature.