People work hard their entire lives to build wealth and assets. This will provide stability not only when they are of working age, but also after they retire. Assets saved for retirement can be a substantial asset to be considered and divided during a divorce. Regardless of which spouse’s name is associated with the actual financial account, any property, including assets deposited into a retirement account through employment, that accrued during the parties’ marriage, is marital property. This means that the court will make an equitable division of those retirement assets during the divorce. When the retirement assets are held liquid form, have been invested in property, or are in certain investment accounts such as a 401(k), it is relatively simple to ascertain the value of those assets and propose a reasonable division to the trial court. However, when one party has some time of deferred compensation through employment, it can become much more complicated.
Deferred compensation is often seen with financial services companies, pharmaceutic companies, and other large corporations. The deferred compensation may take the form of stock options, restricted stock, equity plans, or pensions. These types of compensation will usually “vest” at a certain point, meaning that before they vest, the employee is not actually entitled to the funds in that account.
In divorce cases, the problem becomes how to treat these deferred compensation packages. Usually, when the compensation was granted before the divorce complaint was filed and has already vested, it will often be simply divided by the court. However, in some cases, the compensation may not be vested, and the spouse may be required to continue to work for years until it does vest. In those cases, it is possible to divide the value that accrued during the marriage and treat all other portions of the account as separate property. If the account is not yet vested, the employee will not be able to cash out the account to give the other spouse his or her share. In those cases, the employee spouse will hold the compensation benefits for the other spouse in the form of a constructive trust, also sometimes called a Callahan trust.
Parties also need to be aware that although deferred compensation may be treated as income for tax purposes, that does not mean that it will also be considered as compensation for purposes of setting child or spousal support. In other words, the court will not treat the compensation as both an asset and income.
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