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Don’t forget these assets in a divorce settlement

On Behalf of | Mar 22, 2023 | Divorce

Divorce settlements in Maryland and other states become ever more complex when a couple has substantial assets to divide. High net-worth individuals often receive part of their compensation through stock options and restricted stock.

Divorcing spouses can’t simply split these assets down the middle; understanding how they work is crucial. The more knowledge a spouse has about the employed spouse’s executive compensation, the better they can work toward an equitable and fair divorce settlement.

How to know if the assets exist

Stock options and restricted stock usually do not show up on paychecks or tax returns, making them difficult to find during a divorce if not disclosed by the employed spouse. A person can easily “forget” about these assets if they are unexercised or unvested.

The best places to check for these assets are an incentive compensation plan document, annual award or benefit statements and any award letters. The spouse’s original employment offer document and their employee manual can shed light on the potential existence of these assets.

Understand the instruments

Companies commonly use stock options and restricted stock to motivate and retain key employees. Stock options allow the holder to buy the stock at a set price in the future, while the restricted stock has been granted to the employee but comes with certain restrictions.

Estimating a value for the assets can be challenging and depends on various market factors, including the stock’s trading value and the options’ expiration date.

Consider vesting and taxes

Stock options and restricted stock usually have a vesting period that could keep them locked up for a few years before the employee can sell or exercise them to realize any value. Most employers do not allow stock or options to transfer to another person, even in a divorce.

The employed spouse must place a share of the assets in a trust for the soon-to-be ex-spouse and pay all taxes on the eventual proceeds. If not set up correctly, however, the employed spouse could get stuck paying all the taxes while the other spouse receives all the income.

If a spouse is concerned about getting their fair share of marital assets, a proactive plan can help navigate to a favorable and equitable outcome.