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Divorce and executive compensation

On Behalf of | Nov 14, 2023 | Divorce |

High earners in Illinois often receive more than a simple salary from their employers. Executive compensation packages could include stock options and restricted stock awards. Employers normally document these forms of compensation outside of payroll records, and executives do not have to disclose them on tax returns until cashing out their value. For this reason, they can be hard to identify when examining a couple’s assets in preparation for a divorce. Stock options and restricted stock awards also produce tax consequences and require special handling in a divorce settlement.

Vesting periods

The ultimate value of stock options and restricted stock awards relies on their vesting period. An employee cannot have access to the value of the stocks without remaining employed by the employer for several years.

You cannot assume that an employer will allow access to the stocks until the completion of the vesting period. A divorce will not accelerate the schedule either. Your divorce settlement must accommodate the waiting period by setting up a constructive trust to hold the executive compensation assets until they become available. At that point, the divorced people may divide and distribute the funds.

Tax consequences

The value of stock options or awards depends on their market price at the time that they complete the vesting period. Gains in value made on the stocks will obligate the employee to pay income tax on the proceeds.

To negotiate your divorce settlement, you need to evaluate what the taxes could be. A situation in which one person pays all of the tax while the other person collects the money could happen. Taking this possibility into account could prepare you to negotiate a more equitable settlement.