The more successful people become, the more complicated their financial circumstances typically are. Successful professionals often have a variety of assets that they invest and diversify. High wage earners and well-compensated professionals often receive relatively complex wage and compensation packages and enjoy standard and fringe benefits in addition to their salaries.
Their compensation packages might and often do include deferred compensation. Deferred compensation arrangements may be more immediate or take years for vesting and payment. Deferred compensation takes on many different forms such as: retention bonuses, restricted stock units/options, ownership shares, incentives, dividends, retirement/pension and more. Indeed, sometimes if employees stay with the company for a specific number of years, employees who help a company thrive and retain their positions may benefit significantly from various deferred compensation.
Deferred compensation can easily become a source of conflict when spouses seek to separate their property during divorce. Some people that receive deferred compensation presently or in the future may believe that their deferred compensation is a non-income and/or not a divisible marital asset. Contrary to their belief, deferred compensation might actually be subject to division during divorce as an asset if vested or as income for child support or spousal maintenance purposes.
Income earned during the marriage is divisible
The pool of marital assets is larger than people realize. Unless spouses entered into the relationship with a thorough prenuptial agreement in place, it is standard practice to treat all assets accumulated during the marriage and any income earned by either spouse as marital property. Deferred compensation is usually part of the pool of marital income.
While the income represents work performed by one spouse, both spouses have an interest in all household income accrued during the marriage. Typically, the courts look at when people earned the income, rather than when they received it, for the purposes of property division.
Attempting to address deferred compensation can be quite challenging during divorce negotiations. Spouses have to establish how much of the deferred compensation is part of the marital estate. They have to either agree on a value for the deferred compensation or potentially involve experts to analyze and determine the value of such deferred compensation.
Typically, compensation not yet available (not vested or not exercisable) to a professional is not directly divisible during divorce proceedings. Counsel for divorcing individuals often develop creative ways to integrate the value of deferred compensation, consider tax consequences and ensure that deferred compensation is considered in the overall asset division or income calculation process.