With predictions that bonuses in the banking sector will be high this year; this article considers how bonus payments are dealt with upon divorce and for how long after separation they might be shared with a former spouse or civil partner.
A common form of remuneration for many highly valued employees of established or start-up companies are deferred bonuses. These commonly comprise stock options or cash.
Bonuses can be discretionary or contractual; immediately payable or deferred.
Deferred bonuses are awarded based on an employee’s performance in a particular year, but they are commonly paid three years later, to encourage the retention of the employee. (Unpaid bonuses are usually forfeited if an employee leaves the company).
Whilst over time the amount of a cash bonus might fluctuate in ‘real’ terms, the future value of a deferred stock scheme is far less predictable.
The two most common forms of deferred stock schemes which we come across regularly in family law are:
Upon stock options vesting, capital gains tax is payable on any gain. (This is more significant for RSU schemes as their initial value to the employee is zero).
Owing to their unpredictable value upon vesting, any distribution of bonuses in divorce proceedings should also be ordered to be paid on a percentage basis and net of tax.
Issues about bonuses upon divorce
Issues upon divorce include whether any deferred bonuses should be deemed:
Over the past 20 years there has been considerable diversity in the family court’s treatment of bonuses upon divorce.
Previous approaches to bonuses Upon Divorce
Here is a summary of some approaches to bonuses adopted by the Family Court during the past 20 years:
With so many contradictory approaches about how bonuses should be treated, the division of bonuses frequently became a contentious issue for many families. So, what has changed?
In English family law the principle for division of assets is that the paying party will pay to the weaker financial party the higher of:
a) an equal share of the marital acquest (any assets accrued during seamless cohabitation and marriage) or
b) sufficient to meet the weaker financial party’s reasonable needs, factoring in the standard of living enjoyed during the marriage alongside affordability
A recent family court judgement has also determined that the clock stops for calculating the marital acquest at the date of trial, save in cases where there has been undue delay between separation and trial. This timing point should therefore be factored into any decision about determining the finances related to divorce, as for contentious matters, a trial date might not arise for over a year after the commencement of proceedings.
If sharing the marital assets equally meets both parties’ future financial needs, the court makes a clean break order (i.e., an order where neither party can seek any more money from the other, in life or upon death).
Family judges are encouraged to achieve a clean break to enable financial independence for couples at the earliest date possible.
There is now clear guidance that post-separation earnings (beyond the date of trial) should not be deemed assets to be ‘shared’. E v L [2021] EWFC 60
Therefore:
(The period of maintenance, including the years of bonuses to be used, will depend on when the receiving party can become financially independent).
The court’s fundamental aim is to achieve a clean break for couples to achieve financial independence without undue hardship as soon as possible.
Consequently, unless the weaker financial party’s future financial needs for capital and income cannot be met by sharing the marital assets upon separation, bonuses awarded post-separation (after the date of any trial) should not be shared.
However, those bonuses which were awarded during the marriage but are yet to vest (and very probably including those to the conclusion of any final financial order) will be deemed marital assets for sharing.
Another related consideration when negotiating is to be mindful of sharing the risk/liquidity associated with various assets. For example, if too much of the safer capital, like cash savings, is paid in lieu of any share of deferred bonuses, it is important to be aware that the value of deferred bonuses can fall or be lost altogether if the relevant employee leaves. Once a final financial order is made it is purposefully very difficult to revisit the order’s fundamental terms. Consequently, assessing the risk structure of any draft final order as well as the overall quantum should be considered carefully.
