What to do about businesses and executive compensation in a Texas divorce
Dividing shared bank accounts and real estate is one thing. Dividing a business is another. But all the perks, future revenue streams, and tax implications you have as an executive? That gets even more complicated. Whether you’re divorcing your co-owner or your executive benefits are getting tied up in marital property, you must protect your future. Here’s how business ownership stakes and executive benefits are distributed among ex-spouses.
Are executive benefits considered community property in divorce?
Generally speaking, any assets or income acquired during the marriage are considered community property, no matter the source. The only exceptions are gifts or inheritance specifically granted to one spouse.
While Texas is a community property state, not all shared assets are split 50–50. There’s wiggle room for equitable division that considers the relative value of real estate, investments, etc. However, a business is its own entity with a predetermined distribution of assets and profits. Each spouse’s ownership stake is what enters divorce settlement calculations.
That said, business income is just like any other income: once it’s distributed to an owner or shareholder, it becomes part of their marital property. Whether spouses co-own the business or have separate enterprises (or neither), the income from that business enters the marital estate. That includes:
- profit distributions
- bonuses for sign-on, performance, or retention
- stock options: the right to buy shares of company stock at a set price in the future
- Restricted Stock Units (RSUs): shares granted based on time with company and/or executive performance
- executive perks, e.g. expense accounts and travel allowances
- deferred compensation, e.g. pensions, retirement accounts, and long-term incentives
Notice that many of these benefits include future or potential income. Even if they’re not actualized during the marriage, if they were earned during it, they may be considered community property. Or let’s say the executive began their deferred compensation plan before the marriage. Vesting during the marriage could mean that part of those assets belong to the marital estate.
To learn more, your divorce team must trace executive benefits and all related assets to the source. When were they initiated? How are they funded, vested, or disbursed, and on what timeline? Do they depend on the executive’s performance, time at the company, or both? What is their current and projected valuation?
As with any high-income divorce, a female business owner seeking divorce needs a team of experts:
- Valuation professionals to assess stock options, loans, and other liquid assets/debts related to the business, as well as ownership structure
- Business lawyers to ensure all terms of the shareholder/executive contract are fulfilled and rewrite/restructure your LLC or LLP agreement as needed
- Financial advisors/planners to provide actuarial assistance and long-term value projections
- CPAs or other tax specialists to determine the short- and long-term tax obligations of selling/transferring shares and changing account balances
- Estate attorneys to update wills, trusts, and beneficiaries of your retirement accounts, as well as your business’s successor
- QDRO attorneys to ensure that retirement accounts are handled in compliance with regulation
This versatile team provides vital objectivity as you face big numbers and high emotions. Never let yourself feel rushed into agreements or sacrificing current or future benefits from your business. It’s worth the time and due diligence to ensure you get your fair share.
Looking to build your team? Learn how Alexandra Geczi Family Law works with other specialists to negotiate fair distribution of assets in a high-net-worth divorce.
How are business assets and executive perks divided between ex-spouses?
A business agreement already details how ownership stakes can be dissolved or transferred. Those terms can be executed between divorcing co-owners.
In a perfect world, there was also a prenuptial contract to further clarify who gets what share and how executive perks are divided or reassigned. Or if the spouses created the business together, they clearly outlined the terms for potential division. Thus, there’s already a robust plan for a high-net-worth divorce.
Divorce settlements may involve one spouse buying out the other’s share. In some cases, ex-spouses remain co-owners, preserving the business while dividing their shared domestic income.
As for the executive benefits described in the previous section, it is entirely case-by-case. Anything related to retirement is subject to federal and state regulations before it’s distributed or divested. As always, consult with your financial advisor, but this is typically done through a Qualified Domestic Relations Order (QDRO). The assets can then be equitably divided.
Long-term incentive plans and stock options get tricky because their current value may be wildly different from their projected value. Some people assume that “50–50 division of assets” means everything gets split down the middle as it stands now. But that could leave one spouse in poor financial shape if their executive benefits are valued inaccurately (or overlooked to benefit their ex-spouse).
Thorough financial tracing, accurate valuation, and a detailed timeline can help your divorce team make a case for how the assets are divided post-divorce. When done well, your financial future won’t suffer because:
- your individual bonuses and other executive perks will support you
- you’ll protect yourself from negative tax implications
- you’ll make up for any perceived “loss” of potential assets with a strong individual plan
Are you a woman breadwinner seeking to protect your executive benefits in a pending divorce? Reach out to Alexandra Geczi Family Law to schedule a case evaluation.
Will I get any of my ex-spouse’s executive benefits?
So far, we’ve been focusing on what to do if you are the business executive. But what if you’re the homemaker or otherwise employed? Your soon-to-be-ex’s stock options and other perks may have composed a large part of your financial future.
For community property divorce, all assets acquired during marriage are fair game for division — in terms of their value. In other words, that future earning potential is what must be calculated, just as your shared investments, debts, and real estate are evaluated for long-term growth. A truly equitable division of marital assets must consider the long game, even if no crystal ball is available. (That’s where your diverse team of legal and financial professionals can help!)
So to answer the question: you may not get the executive perks per se, but you may be assigned something of equitable value. As your ex-spouse stands to benefit tremendously from their executive perks, the family court strives to grant you other assets with long-term financial potential.
In some cases, the non-executive spouse isn’t aware of the potentially lucrative stock-based compensation. These assets rely on the long game — and evaluating the future is crucial in any fair and just divorce settlement.
Incentive-based stock options aren’t listed on pay lips or tax returns, making them easy to hide from the marital estate. However, “easy to hide” doesn’t mean “impossible to find.” Be sure your divorce attorney can help with the formal discovery process. Learn more about finding hidden assets.
Need help planning your high-net-worth divorce and figuring out how your executive benefits will be handled in a settlement? At Alexandra Geczi Family Law, we strive to empower women and help them preserve a sustainable financial future after divorce. Reach out today to schedule a no-obligation discovery call.