How are Equity and Deferred Compensation Handled in a New York Divorce?

While a couple may have a significant net worth at the time of their divorce, not all their assets are liquid and easily valued. One or both spouses may have received equity-related or deferred compensation at their job, which may neither be vested nor exercisable. Stock options, restricted stock units (RSUs), and other forms of deferred compensation are among the more complicated assets to deal with during a divorce.

In New York, marital assets are divided equitably (which doesn’t always mean “equally”) between the two spouses. When a spouse is paid in the form of stock options or restricted company stock during their marriage, those options or that stock could be marital assets to be divided during their divorce.

Valuing Equity and Deferred Compensation Awards in a New York Divorce

Valuing equity deferred compensation awards is often challenging. Many employer-provided plans have expiration dates far into the future, and you cannot use the derivatives market entirely as a guide to pricing. Stock options, for example, could be valued based on several factors, including the strike price, the price of the stock, and volatility.

For that reason, the spouse who was granted the award will typically hold the non-titled spouse’s share of the asset until it vests (if at all). They will not be able to transfer it before it vests, and when it does, they’ll be required to pay the taxes on it and divide the net proceeds. This is in the interests of both spouses because both parties share in the risk (i.e., the profits and losses) of an asset over which neither has control.

Determining Which Portions of Equity and Deferred Awards are Marital Assets Under New York Law

One of the most litigated issues in New York divorces involves determining which portions of a deferred compensation award is separate property versus marital property under New York law.

New York courts will typically rely on the DeJesus formula, which came about from a New York Court of Appeals case, DeJesus v. DeJesus, to determine which portion of the deferred award is marital property and which is separate property. The DeJesus formula applies a coverture fraction to the length of time from the grant of the equity compensation until the commencement of the divorce, against the time from the grant until the interest vests.

However, this analysis is not always cut and dry. There could be disagreements about when the deferred compensation was awarded and why.

For example, was the award for past performance or an incentive for future services? The answer will dictate how it will be treated. If it was an award for past performance that occurred during the marriage, it could be deemed marital property. But if it is awarded for future performance that would take place after the divorce, it could be deemed, at least in part, a separate asset.

Often times, this inquiry turns on specific questions that may or may not be answered by the applicable plan documents, such as:

• Would the spouse still receive the award if they left their company?
• What if the spouse received substitute benefits to compensate for the loss of benefits after leaving their employer once the divorce case begins?
• If the spouse retires, are they entitled to keep the compensation or must they give it up?

Equity and deferred compensation presents complicated issues in a divorce. If your divorce may involve valuing or dividing equity or deferred compensation, consider working with a divorce attorney who has experience in high-net-worth divorces as well as with other experts, including a financial expert who knows how to value equity and deferred compensation and a tax planner.

At Mosberg Sharma Stambleck Gross, we know how to leverage our experience to find creative solutions to our clients’ difficult divorce issues, including valuing equity and deferred compensation during a divorce.

Call us today at 212-678-8500 to learn more about how we may be able to help you with your family or matrimonial law issues.