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The Impact of Divorce on Executive Compensation Packages and Stock Options

Divorce and Executive Compensation

Divorce can have significant financial implications for both parties—especially for high-earning executives with complex compensation packages and stock options. Both executives and their spouses stand to lose or gain a lot during the divorce process. Understanding the impact of divorce on executive compensation is essential for navigating the complexities of asset division and ongoing spousal support.

Whether you are a high-earning executive or you’re married to one, it is important to understand the challenges you may face as you navigate your Louisville divorce. Call John H. Ruby & Associates at 502-373-8044 to set up a consultation with our team now.

Fair Valuation of Executive Compensation Packages

One of the main challenges in divorces involving executive compensation is securing a fair valuation of these complex assets. Executive compensation packages often include various components such as base salary, bonuses, stock options, restricted stock units, performance-based incentives, and other unique perks. Valuing these assets accurately requires expertise in financial analysis, tax law, and corporate governance. Appraisers and financial experts may be brought in to assess the present value of executive compensation packages, taking into account future earnings potential, vesting schedules, and other relevant factors.

How Executive Benefits Are Divided During Divorce

In divorce proceedings, executive compensation benefits are subject to equitable distribution, as Kentucky follows this principle when dividing marital property. If the executive income was earned during the course of the marriage, it’s likely considered marital property. However, stocks and other assets earned prior to the marriage may remain separate property.

If a couple is unable to come to an agreement during negotiations or mediation, the court will have the final decision. This is generally the least favorable outcome, as both parties give up complete control over the decision-making process and must abide by whatever the court decides.

One issue that often comes up in these divorces is why certain executive benefits or bonuses were awarded. This can make a difference in whether or not they are subject to equitable distribution. Imagine, for example, an executive receiving RSUs as a bonus for work that is done. That work is in the past and occurred during the marriage, and those RSUs may be subject to division. But if the RSUs were a retention bonus aimed to keep the executive performing competitively in the coming year, they may be based on future performance. That may affect how they are split up. 

Tax Implications of Asset Transfers

The division of executive compensation benefits in divorce can have significant tax implications for both parties. This is one reason you should work closely with an attorney with extensive experience in high-asset divorces. No matter which side of the divorce you are on, you want to make sure you are not setting yourself up with tax surprises down the road.

The Role of Spousal Support

Spousal support is a very common topic in high-net-worth divorces. If one party is a high-earning executive and the other earns considerably less or works as a homemaker, it’s likely that the lower-earning party will be entitled to spousal support if the marriage has lasted several years. The amount of spousal support is often determined by the income earned by the higher-earning party, but this can be challenging in this situation. An executive’s income may change significantly from year to year, based on the company’s performance, the bonuses available to them, and their personal performance within the company. In these situations, the courts would likely look at what it would take to maintain the spouse’s standard of living and the high-earning spouse’s average income over a set period of time.

The way in which assets are divided in a divorce also affects spousal support. If the lower-earning spouse takes a larger share of the marital assets in exchange for less or no spousal support, this can limit the amount the higher-earning spouse must pay.

Prepare for Your Divorce with John H. Ruby & Associates

Having the right legal team by your side can make a significant difference in the outcome of your divorce. Find out how the team at John H. Ruby & Associates can help you now. Call us at 502-373-8044 or fill out our online contact form.