For any family law practitioner, a high net worth and asset-rich divorce matter can become complicated. Depending on which party the attorney represents, careful thought must be given to the division of assets, tax consequences and the calculation of income for support purposes. This task has become more difficult with the recent volatility of the stock market and the many changes in high earning executive compensation, retirement and bonus packages. A recent article in BusinessWeek by Alexis Leondis addresses and reminds us of many of these changes.
As many big financial firms gained media attention as a result of their financial practices and federal bailouts hit the streets, these companies were forced to take a closer look at their executive compensation packages. Historically, many of the higher up executives received what some would call enormous bonuses in addition to their already six figure salaries. These bonuses were included when calculating support figures as this money was typically used to meet daily expenses of the family, including the maintenance of lifestyles that consisted of private school tuitions, nannies and luxury vacations.
Recently, many companies have been forced to restructure their bonus programs. This change has forced many family law attorneys to take a step back and rethink how the restructuring will change financial settlements of divorce matters for their clients. More specifically, in many circumstances, those enormous bonuses have been drastically cut and instead are being paid in terms of restricted stock options that may vest over a certain period of time and require employees to remain with the company in order to receive the benefit of these options. They also include deferred money payouts, again requiring employees to remain with the company in order to receive this benefit. This also translates to less cash money in hand, which has impaired the ability to maintain the lifestyles mentioned above, especially since there are now two households to support, as is usually the case in a divorce scenario.
The changes in bonus payouts has also thrown a bit of a wrench into determining income for child support and alimony or spousal support purposes. Common practice has been to take an average of the last 3-5 years of the supporting spouse’s income and utilize that number as the basis of their support obligation. However, going forward, this may not be the best practice given the volatility of the market in the last 2-3 years and the unpredictability of its future. Family law attorneys are being forced to come up with creative and equitable alternatives in determining this number for support purposes and those solutions will vary on a case by case basis.
Lastly, these changes may affect how family law attorneys determine whether or not the bonuses paid out should be considered income or an asset. In NJ, it cannot be utilized as both as that would result in an unfair “double dipping”. This could become more difficult especially as more and more bonuses are being paid out in stock options or deferred compensation. With stock options, they typically have no value until they are vested, which could be several years into the future.
The recent changes in executive compensation of Wall Street employees is something every family law attorney must consider. Being aware of these changes and how it may affect our clients will help prepare us in creating a settlement or our client’s position for trial. Either way, these are changes that cannot be ignored.