How are different types of income treated during your divorce?

 Posted on May 01, 2020 in High Net Worth Divorce

Receiving the best possible financial outcome is vital when you are going through a divorce. But dividing marital assets can be complicated when one spouse receives his or her income through various means, including bonuses or stock options.

When compensation comes solely from a salary, negotiations are likely to be straightforward, and the timing of the divorce will typically not make a difference. However, it's vital to understand where your earnings come from and how the process could impact them.

Types of income and possible effects of divorce

If your compensation package includes any of these provisions, an experienced family law attorney here in Texas can help you protect these assets during negotiations:

Prepaid bonus with clawback provision: Employers sometimes pay a person a large bonus at the beginning of their employment, but the funds are subject to a clawback, or requirement that the funds will be repaid if the worker leaves the job early or doesn’t meet performance standards.

• Potential divorce impact: Bonuses paid during a marriage are typically considered community property in Texas and are subject to division. Employees should make sure conditions for repayment are clearly outlined in the contract and include circumstances under which a spouse may also have to pay back their portion.

Bonus paid for a prior year: If a person is undergoing a divorce and receives a bonus for the work they did during the previous year, it is likely to be considered a marital asset and is subject to division.

• Potential divorce impact: In this case, be aware of “double counting,” where a spouse's attorney demands that the bonus is divided, but then insists that the full amount is considered in a person's total income figure, especially when that number is used to calculate spousal support.

Stock options: A common employment benefit for many, stock options can be extremely complicated to divide during a divorce. When they are identified as community property, they must be valued, and alternatives must be discussed on how to distribute them.

• Potential divorce impact: There are numerous possible tax consequences for splitting stock options 50/50, and some companies prohibit the transfer of rights. The spouse with the stocks in their name may consider offsetting the value with another asset, or both parties can agree to wait for a specified time before exercising an option and dividing the proceeds.

If you set your own wages, pay yourself a fair salary

For business owners or others who set their own pay levels, make sure you pay yourself at least the market rate for the work you do. On the other hand, avoid drastically reducing your compensation as a reaction to a divorce.

Courts will likely not accept the lower figure and base support calculations on the prior year's earnings, unless there are valid reasons not related to the divorce. Your attorney can help you determine the best methods to protect your income and help you receive the best possible outcome.