High end or high asset divorces in Pennsylvania often involve a business interest or some type of executive compensation. There are multiple issues that come into play in these situations:
- Is the business interest or compensation considered marital property that would be subject to equitable distribution?
- What is the marital value of the business or compensation?
- What is the current value of the business or compensation?
- What is the appropriate valuation of such business interest or compensation and how is that ascertained?
- How do we determine the appropriate method of valuation?
Is the Business Marital Property? Not Always a Simple Answer
The question of whether a business or business interest is marital property isn’t always simple. Under Pennsylvania divorce law, any property acquired during the marriage is considered marital property. There are some exceptions to this rule. Read more about marital property and equitable distribution in Bucks County divorces.
In a Bucks County divorce, property acquired prior to the marriage is not usually considered marital property. However, if the property acquired prior to the marriage increased in value during the marriage, the increase in value would be considered marital property. With respect to a business, increases in a party’s ownership percentage or increases in value of the business interest that occurred during the marriage may be considered marital property. This applies to all types of property, including real estate, retirement accounts, etc. With regard to compensation, if it was acquired or earned during the marriage it is most likely considered marital and subject to division during divorce, even if the vesting date of the compensation is after separation or even divorce. This includes all forms of compensation including, but not limited to, Incentive Stock Options (ISO’s), Non-Qualified Stock Options (NQSO’s), Restricted Stock Units (RSU’s), Long Term Incentive Plans (LTI’s), retention bonuses, severance packages, forgivable loans, etc.
Example 1: Husband gained 50% ownership of a small company several years before getting married. After the marriage, he continued to operate the company with his business partner. During the marriage, the wife ran the household and cared for the couple’s children. During the course of the 10 year marriage, the husband’s business acquired two companies and thereby grew substantially. In this instance, the husband’s 50% ownership interest in the small company would not be considered marital property. However, the acquisition of the two other companies and growth of the business during the marriage would be considered marital property.
Is Executive Compensation Marital Property? Not Always a Simple Answer
In a Bucks County divorce, property, including compensation and deferred compensation, acquired during the marriage is usually considered marital property. Deferred compensation can be quite complicated and especially when it comes to the tax treatment of that deferred compensation. Even though a form of compensation may not have any value at the time of equitable distribution, it may still have some value in the future and that value is subject to division.
Example 1: Wife was granted stock options during the marriage with a grant price (determined by the price of the stock at the time of grant) well below the current market value of the stock. The stocks don’t vest until after separation but, at the time of division the stock options are worth twice their grant price. In this case, the difference between the grant price and the market value are marital and subject to equitable distribution.
Example 2: Wife was granted stock options during the marriage with a grant price (determined by the price of the stock at the time of grant) well above the current market value of the stock. The stocks don’t vest until after separation but, at the time of division the stock options are worth one-half their grant price. In this case, the stock options have no value and an inexperienced attorney would value them as such during equitable distribution and essentially “give them away.” However, it may make sense to divide the options in the event the stock price rises above the grant price.
In this case, there is no peril for the spouse or the Wife because if the stock options remain below the grant price in perpetuity, they will likely expire and have no cost to either party. If the options rise above the grant price prior to expiration, the marital value should be shared just like Example 2.
Valuation of the Business
Valuation of the business requires careful analysis by an experienced and certified appraiser with the best credentials. Experience in the specific type of business are just some of the credentials to consider when hiring a business appraiser. In the best case scenario, both parties will agree on a neutral third party appraiser. In some cases, each party will hire their own appraisers.
Once valuation of the business is determined and agreed upon by the parties, the parties can negotiate the division of their marital assets without court involvement. This is the preferred and least costly method and can be accomplished with a marital or property settlement agreement.
It is important to note that even if parties can negotiate the division of marital assets without court involvement, it is best to have a knowledgeable lawyer who has experience in handling high income divorces throughout the negotiation process. The lawyer can make sure all of the marital assets are included in the settlement agreement. Sometimes, a party may try to hide assets to avoid paying more to the other party. An experienced Pennsylvania divorce lawyer can conduct asset investigation and analysis to make sure your interests are protected.
In cases where the parties cannot reach an agreement, litigation may be necessary. Many parties will reach an agreement after a Master’s Hearing, where a court-appointed attorney conducts a hearing or conference to resolve the disputed claims. If the Master’s Hearing is unsuccessful, the parties will then continue to a formal hearing or proceeding in front of a family law or divorce law judge. Read more about the Master’s Hearing for dividing marital assets in Bucks County divorces.
Is a Certified Divorce Financial Analyst (CDFA) Necessary in a PA High End Divorce?
While it is not necessary, it is very helpful to have a financial analyst on your side in a high income divorce. It is even more helpful and advantageous when your divorce lawyer is a Certified Divorce Financial Analyst (CDFA). CDFAs are specially trained to analyze financial issues related to dividing assets/property in divorces.
High net worth divorces are complicated because they involve numerous investments, businesses and/or assets, etc. A divorce lawyer who is also a CDFA is well versed in divorce law as well as in financial and tax laws.
Firm partner Kevin Zlock has extensive experience in handling high income divorces and can help guide you through divorce and analyze all of the financial data to best protect your interests.