Employment Benefits, Stock Options, & IP Under Property Division Law
Most of a divorcing couple’s valuable assets are usually in the forms of real estate, businesses, and investments, but on occasion one or both spouses will have other assets worth considering, such as employment benefits, stock options, and intellectual property. However, courts differ on whether to treat these assets as income or property. If an asset is income, it will be factored into the calculation of spousal and child support. If the asset is instead property, it will be divided between the spouses upon divorce.
Employment Benefits
Employment benefits may include such things as bonuses, overtime, vacation or sick pay, or company perks like club memberships or company cars. Some employment benefits have an obvious value, such as a guaranteed bonus, but others, like paid time off, might only have value if the company pays the employee in cash for an unused portion of the benefit. Besides being difficult to value, not all states treat employment benefits as marital assets. For instance, paid time off exchanged for cash during the marriage may be treated as a marital asset, but paid time off earned during the marriage but exchanged for cash after separation may be a separate asset.
Bonuses, overtime, and other deferred compensation, like commissions, while easier to value, may be difficult to categorize. For example, Katarina works at a firm that promises a $50,000 bonus after she brings in 10 new clients. Katarina has brought in seven new clients when she files for divorce. One court may order Katarina to split 70 percent ($35,000) of her expected bonus with her ex-spouse, since she had earned 70 percent of the bonus during her marriage. Another court may factor Katarina’s expected bonus into her income when calculating her alimony and child support obligations, but not consider any of it marital property for division. If Katarina had instead only brought in one client by the time that she filed for divorce, a court may disregard the bonus entirely as too speculative.
In situations involving high earners, deferred compensation may be an employer’s promise to pay a substantial sum of money at a certain later date, such as the employee’s retirement. These types of deferred compensation plans, such as deferred savings plans and supplemental executive retirement plans (SERPs), may be riskier to value because they may not be realized for years, if at all, and are not protected from a company’s creditors. Unlike a 401(k) or pension plan, deferred compensation plans may not be paid out to an ex-spouse directly. Therefore, any division is paid directly from one spouse to the other. How much of a deferred compensation plan is marital property and whether it should be considered in spousal and child support calculations will probably be a fact-specific analysis.
Stock Options and Restricted Stock Units
A stock option is an option given by an employer to an employee to purchase a certain amount of stock in the future for a fixed price. Stock options do not vest until an employee gains the right to exercise them. Therefore, some courts may treat non-vested stock options as separate assets rather than marital assets. Even so, stock options may or may not be factored into spousal or child support calculations. Stock options that vest and are exercised during the marriage are most likely marital property, but what if stock options vest during the marriage but are not exercised until after separation? What if those stock options were earned before the marriage? What if stock options are earned during the marriage, but do not vest until well after divorce?
Stock options in and of themselves hold risk because an employee is not guaranteed that their option’s fixed price will be lower than the stock’s market price when they exercise their option. Similarly, if the employee holds the stock rather than selling right away, they risk losing the entire investment. Most stock options are not transferable, so the non-employee would need to rely on their ex-spouse to exercise the options on their behalf. If this becomes the arrangement, the non-employee would need to reimburse their ex-spouse for any fees or tax consequences of the purchase or sale. Depending on how well the ex-spouses trust each other, it may be easier to estimate and buy out the non-employee’s share of the options upon divorce.
Restricted stock units are similar to stock options, but the employee automatically receives the shares of stock once the restricted stock units vest. The same issues regarding whether an asset is marital or separate, and whether it is property or income, will apply to restricted stock units. Restricted stock units are more likely than stock options to be lost when an employee leaves their company before they vest, and an ex-spouse cannot force the employee to stay at the company until the units vest. Therefore, as with stock options, divorcing spouses will need to weigh the risk that the restricted stock units will never vest in determining whether to negotiate a buyout.
Patents, Copyrights, and Other Intellectual Property
Intellectual property can be another complicated asset in a divorce. Courts may take a fairly fact-specific approach in determining whether any portion of the intellectual property is a marital asset or whether it should be factored into spousal or child support calculations. Courts tend to disregard intellectual property when its future value is too speculative. However, a court is more likely to take intellectual property into account when it has already made returns or is likely to make returns in the future.
