The division of assets is one of the main issues to resolve during divorce proceedings. For people with very high incomes and substantial assets, and their spouses, being able to reach a fair financial settlement is, understandably, a key concern, given the number of potentially complicating factors and levels of income that need to be taken into account.
Decisions as to what happens to future income is often where there is most difficulty in reaching an agreement in a divorce settlement involving a high earning spouse. This is particularly so where complex reward structures are involved that are not fully understood by one, if not both spouses.
Failure to fully take into account incentive and performance reward packages can have significant implications on the outcome of a divorce settlement and risk restricting either party’s choices in the future, so it’s vital you seek specialist legal advice.
Incentive payments and performance payments not yet realised
There may be circumstances where there are financial resources in place through incentive and performance reward packages which originated during the marriage, although they are not immediately available at the time of the divorce settlement.
Such financial resources may well be shared in a divorce to achieve fairness between the earning and non-earning spouse.
Incentive and performance reward packages are aimed at attracting and retaining the best talent and are likely to be nuanced from firm to firm and industry to industry. However enhanced remuneration structures do tend to follow certain themes, such as:
- Share options (or stock options)
Share option schemes are typically used as an incentive for employees. A share option is the right to buy a certain number of company shares at a fixed price at some point in the future. Share option schemes often come with tax incentives.
There are different share option schemes you may come across such as Company Share Option Plans, Enterprise Management Incentives, Nil-Cost and Nominal Costs Options, Share (Stock) Appreciation Rights, Sharesave Share Option Schemes and ‘Phantom’ Options.
- Long term incentive plans
A long-term incentive plan (LTIP) is a term that is commonly used among listed companies to describe executive share plans under which a company makes share-based awards to senior employees with a vesting period of at least three years. Such structures are also often called ‘performance shares’ or, in the US, ‘restricted stock units’.
Again there are often tax efficiencies to these schemes. LTIPs are not restricted to rewards in shares; cash also features in these reward structures.
- Management incentive plans
A management incentive plan (MIP) most often refers to a scheme where the equity is allocated to senior management in a privately-owned business. The company is likely to be owned by a private equity house and the equity would vest with the senior management in the event the private equity house sells its share the business or the company is floated on the stock market.
- Performance bonuses
A form of additional compensation paid to an employee or department as a reward for achieving specific goals or hitting predetermined targets. A performance bonus is compensation beyond normal wages and is typically awarded after a performance appraisal and analysis of projects completed and/or financial targets met by the employee over a specific period of time.
Sharing of payments – what to consider?
There is a distinction to be made between those sums payable under such incentive or performance schemes which realise a value in the future with no further input from the earning spouse and those which require further endeavour after the marriage is over in order to realise their maximum potential.
This will affect how the income derived from such sources will be treated in a divorce settlement.
The timing of payments will also be a consideration. A performance bonus might be shared if it is awarded close in time to the end of the marriage, however it is less likely to be shared if awarded well after the relationship is over.
As a general rule, it is possible to share in the benefits of such schemes even following divorce, however consideration will be given to the value or opportunity which arose during the marriage against any extra input required by the earning individual to realise an enhanced value at a later date.
Future maintenance provisions
It is not always the case that on divorce, one party must pay to the other an amount out of their income in the future. However, long-term maintenance can be required as part of a fair outcome in a divorce.
There are two classes of maintenance – child maintenance and spousal maintenance. The two combined together are often referred to as global maintenance. Where spousal maintenance features, a settlement or court order tends to be based on two principles:
- what each party might need to live on in the future;
- whether it is appropriate that each party should share in financial resources in the future.
It should be stated that future earnings or earning capacity, whilst relevant, is unlikely to be considered a matrimonial asset to be shared and so ongoing maintenance must be linked to a demonstrable income ‘need’ rather than a sense of entitlement or sharing.
Complex arrangements require specialist advice
The issue of the future value of income in the context of divorce proceedings is a complicated area to navigate both for the earning and non-earning spouse and specialist advice should be sought at the earliest opportunity.
At Tees our expert legal advisers work to ensure that a fair financial settlement can be reached to ensure that future needs can be met according to the financial resources available. We also work closely with financial advisers in our Wealth Management team where needed - they will seek ensure that any future financial planning considerations are taken into account so you both have a clear view of your financial future.
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