Q: What are executive compensation plans? JC: Executives receive compensation you would
typically expect such as salary, bonus and retirement plans like
RRSPs or pensions. Those types of benefits are easy to deal with in
family law cases. The challenge occurs when executives receive more
complex compensation such as stock options and restricted share
units. So, From a family law perspective, these require a bit more
Q: How does a spouse's executive compensation plan
impact the valuation of their property? JC: Compensation that was awarded, but not yet
received prior to separation, can be considered property for family
law purposes. A good example of this is stock options, which can
have value, but that value will only be realized when the options
are exercised at some point in the future. Therefore, at the time
of separation, the value must be considered.
Q: What impact do compensation plans have on income for
support purposes? JC: From an income perspective, executive
compensation plans can be tricky. This is because benefits
sometimes show up years after the compensation is granted. It's
important to understand how these plans work and when the benefit
will show up in the spouse's tax return.
Q: What are Stock Options and how do they affect
property? JC: Stock options give the executive the ability,
but not obligation, to buy shares of a company at a set price for a
specified time period. For example, if you were granted 1,000
options to buy shares of company at $10 for 8 years, you could buy
them for $10 regardless of their current price. If the stock price
goes above $10, you could exercise the options and pocket the
difference. If the stock price goes down, you simply wouldn't
exercise them. We, as business valuators, use valuation models to
determine the value of the options.
Employee stock options carry additional risks because they are not
traded on public markets and often come with additional
restrictions and terms. For example, some plans cancel the options
if the spouse's employment is terminated. We deduct discounts
for these risks and then deduct income taxes. Stock options are
usually considered property for family law purposes. In the year
they are exercised, they can also be considered income for support
Q: How do Stock Options impact an executive's income
for support purposes? JC: If an executive exercises his or her stock
options, the amount that will be included in income will be the
difference between the stock price and the price the shares were
purchased at. For example, options exercised at $10 for shares that
are worth $30 would result in income of $20 per share. One thing
that is important to know is that there will typically be no income
related to stock options unless or until they are exercised.
Q: What are Restricted Share Units? JC: Restricted Share Units, also known as RSUs,
are bonuses in the form of company stock provided to executives.
RSUs are effectively shares of the company that are restricted from
being accessed or sold for a defined period. Once this time period
lapses, they vest, which means their restrictions are lifted.
Vesting periods are typically three years and are sometimes
staggered. On the "vest date," the executive will receive
the shares and is free to sell them.
Q: How are Restricted Share Units valued? JC: Restricted Share Units are normally considered
property for family law purposes. The value of RSUs is determined
by multiplying the number of RSUs by the stock price at the
valuation date. Like stock options, RSUs are not publicly traded.
Not only can you not trade them, but they carry additional risks as
well. We apply discounts for these risks and then deduct income
taxes. In the year they vest, they can also be considered income
for support purposes.
Q: How do Restricted Share Units impact an
executive's income for support purposes? JC: RSUs are included in a spouse's tax return
as income in the year they vest. The amount included in income is
normally the stock price at the vest date multiplied by the number
of RSUs. For example, if 1,000 units vest at a share price of $20,
the amount that will be included in the spouse's income is
$20,000. In summary, stock options and RSUs are just two examples
of the types of executive compensation plans that exist. It is
important to understand how the plans work and the potential impact
on property and income for family law purposes.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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