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The challenges of addressing deferred compensation during divorce

On Behalf of | Jan 30, 2025 | Divorce |

Divorce proceedings or negotiations can become much more of a challenge as the portfolio of marital assets becomes more diversified. Couples in high-asset, high-income marriages often struggle to find solutions for property division.

The extent of their marital estate and the variety of assets that they have accumulated during the marriage make attention to detail crucial during property division negotiations. Certain specific resources are more likely than others to become sources of conflict and complication during property division proceedings.

If either spouse has an employment contract that extends opportunities to earn deferred compensation, those as-of-yet unpaid wages can be a stumbling block during property division proceedings. How can deferred compensation complicate negotiations?

The compensation may be partially marital, partially separate

Companies offer deferred compensation to reduce income tax obligations, promote worker retention and encourage better job performance. Deferred compensation may consist of bonuses, retention pay or even stock options provided to workers in a structured manner.

Frequently, deferred compensation is partially marital property but partially separate property. Any amount of income earned during the marriage is likely marital property, even if the spouse hasn’t received it yet. One spouse may have completed two of the required years of employment to receive the deferred compensation during the marriage.

However, they have another year before they can access their stock options. Spouses may need to set a valuation date and agree on what portion of the deferred income is part of the marital estate and what is separate property that belongs to one spouse.

Valuing the compensation can be a challenge too

Sometimes, deferred compensation is a specific percentage of sales or a set amount paid as a bonus for retention or job performance. However, often the value of deferred compensation is variable.

It depends on job performance or how well the company performs. In cases involving stock options, the company may not yet have publicly traded stock to provide a basis of valuation for the deferred compensation. Spouses may find it challenging to agree on what the deferred compensation is actually worth.

Identifying resources that can potentially complicate property division can help spouses ensure that they obtain a fair outcome during high-asset divorce proceedings. The deferred compensation owed to one spouse may require careful consideration during divorce negotiations or while preparing for litigation.