How are bonus payments treated in divorce cases?
This is a common question clients put to their divorce lawyer, and understandably so. Here we consider how bonus payments are dealt with upon divorce and for how long after separation they might be shared with a former spouse or civil partner.
Bonuses often comprise stock options or cash. They can be discretionary or contractual; immediately payable or deferred.
Deferred bonuses are awarded based on an employee’s performance. It can be common for deferred bonuses to be paid three years later with a view to ensuring the employee stays with them. (Unpaid bonus entitlement is usually lost if the employee leaves the company).
A cash bonus may fluctuate over time. The future value of a deferred stock scheme is much less predictable.
Family lawyers often come across two forms of deferred stock schemes which are:-
Stock options – this is where the employee is offered shares at a particular price which vest on a certain future date; and
Restricted Stock Units (RSUs) – this is where the employee is granted a certain number of shares each year without any purchase. These are increasingly popular with start-up and technology companies.
Upon the stock options vesting, capital gains tax is payable on any gain. This is more significant for RSU schemes, as their initial value to the employee is £0
Due to their unpredictable value upon vesting, any distribution of bonuses in divorce cases should also be ordered to be paid on a percentage basis and net of tax.
Issues upon divorce include whether any deferred bonuses should be deemed:-
a) Capital to be shared as other marital assets; or
b) Income to be shared as maintenance post separation
Over the years, there have been markedly differing approaches taken by the family courts towards bonuses.
The current approach of the Family court when it comes to bonuses
There is now clear guidance that post-separation earnings (beyond the date of trial) should not be deemed assets to be “shared”. Therefore:-
- Whilst bonuses awarded during the marriage should be deemed capital marital assets and be shared; bonuses awarded after separation (beyond the date of trial) should not be deemed to be capital marital assets and therefore should not be subjected to sharing.
- However, if the weaker financial party’s future capital and income needs can not be met by sharing half the marital assets, including deferred bonuses awarded during the marriage, then post separation income (including potential bonuses awarded post separation) can be used to pay maintenance to the weaker financial party or as an additional lump sum to meet their future financial needs.
The court’s aim is to achieve a clean break for couples so that financial independence can be achieved as soon as possible, without undue hardship.
Unless the weaker financial party’s future financial needs for capital and income can not be met by sharing the marital assets upon separation, bonuses awarded post-separation (after the date of any trial) should not be shared.
However, those bonuses which were awarded during the marriage but are yet to vest will be deemed marital assets for sharing.
