Dividing Deferred Compensation in Divorce

No matter how much you planned for the future, your marriage just did not work out. Now, you are wondering about your other plans for the future, such as those stock options you have yet to cash in.

When you have deferred compensation of any type, working with a Columbia divorce attorney is hands down essential. There is too much on the line to proceed without legal guidance on what specifically is applicable in your situation.

What is deferred compensation?

Deferred compensation refers to any assets, typically from earnings or compensation for your work, that are held back from immediate payment, typically with the goal of providing for you later in life. Most employees with deferred compensation allocate those funds aside in a retirement savings vehicle. That allows the employee to obtain any potential tax advantages while also creating an opportunity to plan for future financial goals.

Other types of compensation may fall into this area, depending on your situation. Some examples include:

• Severance agreements
• Stocks
• Stock options
• Executive compensation packages

These are often heavily invested assets intended to grow over time. If you are divorcing, your worst-case scenario might involve having to liquidate and divide these assets with your spouse, potentially costing you millions.

Is deferred compensation marital property?

The short answer is yes, deferred compensation earned during the marriage is typically considered marital property. As a result, it must be disclosed and considered when it comes to determining property division. You may not have any plans to access the funds for years (even decades) but because it was earned during the marriage, both parties could have a right to it.

However, if you earned your deferred compensation prior to marriage and did not contribute to it during the marriage, those funds might not be subjected to division. There are some limitations to this, but for the most part, those funds may be safe.

What can you do to preserve deferred compensation through a divorce?

To navigate these complexities effectively, consulting with a high-asset divorce attorney in Columbia, Bethesda, Rockville, or Fulton is essential. Each situation is unique, and the approach to handling deferred compensation should be tailored to your specific circumstances. Here are some strategies to consider:

Retain the Entire Account: One option is to keep the account intact by offsetting the value with other marital assets. For instance, if your spouse receives an equitable amount from other property, you could retain the deferred compensation in full, protecting your long-term financial interests.

Divide the Account: In some cases, the court may issue a Qualified Domestic Relations Order (QDRO) or other appropriate order to divide the account, ensuring both parties receive a fair share. This method works well for most types of retirement accounts but can be challenging with certain assets like stock options, which require careful handling and consideration.

Defer Distribution: With assets like stock options, deferred distribution might be necessary. This means that the marital partner will receive their share of the options when they are exercised. Courts often require the employee to exercise the stock options, but the timing and manner can vary, impacting the value received.

Consider Present Valuation: You might also opt for present valuation, where the current value of the asset is assessed and an equivalent asset is provided to the spouse. This approach can be risky if the asset does not appreciate as expected, potentially leading to inequities in the division.

What is the best route to take?

There is no one solution that applies to every situation. In short, as a component of your divorce agreement, you will need to factor in the current value of any asset owned as deferred compensation, the expected value of that over time, the requirements of each spouse, and the options for dividing other marital property.

The key here is to work through the negotiation process to determine the best route forward for your situation. This may include exercising the options or otherwise dividing the assets through a QDRO, depending on the type of assets involved. In a high net worth divorce, this can be critical to ensure that all decisions are made with the current needs of both spouses in mind but also the risk of serious financial loss that could occur should the assets be “cashed out” to be divided.

Your best bet is to talk about it with a Columbia high-asset divorce attorney. Our team at McCabe Russell, P.A., is ready to help you. We will provide you with a very specific, clear strategy that provides the best possible outcome in your legal matter. That is going to be different for every party. Call our office or fill out our contact form. We have offices in Fulton, Columbia, Bethesda and Rockville.