For many people, uncertainty about future income can be one of the most stressful aspects of divorce. For people with very high incomes and substantial assets, and their spouses, being able to reach a fair financial settlement is, understandably, a key concern, given the number of potentially complicating factors and levels of income that need to be taken into account.
Why future income is so contentious in divorce
Decisions as to what happens to future income are often where there is the most difficulty in reaching an agreement in a divorce settlement involving a high-earning spouse. This is particularly so where complex reward structures are involved that are not fully understood by one if not both spouses. A key issue is whether a payment reflects work done during the marriage, or whether it depends on future effort after separation.
The importance of understanding incentive and reward structures
Failure to fully take into account incentive and performance reward packages (‘incentive schemes’) can have significant implications on the outcome of a divorce settlement and risk restricting either party’s choices in the future, so you must seek specialist legal advice.
What happens to incentive payments that have not yet been paid?
There may be circumstances where there are financial resources in place through incentive schemes which originated during the marriage, although they are not immediately available at the time of the divorce settlement.
Such financial resources may well be shared in a divorce to achieve fairness between the earning and non-earning spouse.
Incentive schemes are aimed at attracting and retaining the best talent and are likely to be nuanced from firm to firm and industry to industry. However, enhanced remuneration structures do tend to follow certain themes, such as:
Types of incentive and reward schemes
Share options (or stock options)
Share option schemes are typically used as an incentive for employees. A share option is the right to buy a certain number of company shares at a fixed price at some point in the future. Share option schemes often come with tax incentives.
There are different share option schemes you may come across such as Company Share Option Plans, Enterprise Management Incentives, Nil-Cost and Nominal Costs Options, Share (Stock) Appreciation Rights, Sharesave Share Option Schemes and ‘Phantom’ Options.
Long-term incentive plans
A long-term incentive plan (LTIP) is a term commonly used by listed companies to describe executive share plans under which a company grants share-based awards to senior employees with a vesting period of at least 3 years. Such structures are also often called ‘performance shares’ or, in the US, ‘restricted stock units’.
Again, there are often tax efficiencies to these schemes. LTIPs are not restricted to share-based rewards; cash also features in these reward structures.
Management incentive plans
A management incentive plan (MIP) typically refers to a scheme that allocates equity to senior management in a privately owned business. The company is likely to be owned by a private equity house, and the equity would vest with the senior management in the event the private equity house sells its share in the business or the company is floated on the stock market.
Performance bonuses
A form of additional compensation paid to an employee or department as a reward for achieving specific goals or hitting predetermined targets. A performance bonus is compensation beyond normal wages and is typically awarded after a performance appraisal and analysis of projects completed and/or financial targets met by the employee over a specific period.
In divorce, these schemes may be treated as a matrimonial resource even if they cannot yet be accessed.
How do courts decide whether future payments should be shared?
There is a distinction to be made between those sums payable under such incentive schemes which realise a value in the future with no further input from the earning spouse and those which require further endeavour after the marriage is over to realise their maximum potential.
This will affect how the income derived from such sources will be treated in a divorce settlement.
The timing of payments
The timing of payments will also be a consideration. A performance bonus might be shared if it is awarded close in time to the end of the marriage, however, it is less likely to be shared if awarded well after the relationship is over.
Fairness, needs and ongoing contributions
As a general rule, it is possible to share in the benefits of such schemes even following divorce, however, consideration will be given to the value or opportunity which arose during the marriage against any extra input required by the earning individual to realise an enhanced value at a later date and whether this can be justified by reference to needs.
Future maintenance provisions after divorce
It is not always the case that in divorce, one party must pay the other an amount out of their income in the future. There has been a general movement away from maintenance being “for life,” with courts preferring to award maintenance as a shorter-term stepping stone to help the non-earning spouse transition into financial independence. In some circumstances, long-term maintenance can be required as part of a fair outcome in a divorce. Maintenance is assessed on a case-by-case basis, taking into account both parties’ needs and the overall fairness of the outcome.
Child maintenance and spousal maintenance
There are two classes of maintenance – child maintenance and spousal maintenance. The two combined are often referred to as global maintenance. Where spousal maintenance features, a settlement or court order tends to be based on two principles:
• what each party might need to live on in the future;
• whether it is appropriate for each party to share in future financial resources.
It should be stated that future earnings or earning capacity, whilst relevant, is unlikely to be considered a matrimonial asset to be shared and so ongoing maintenance must be linked to a demonstrable income ‘need’ rather than a sense of entitlement or sharing.
Complex arrangements require specialist advice
The issue of the future value of income in divorce proceedings is complicated for both the earning and non-earning spouses. Early advice can help avoid costly mistakes and give clarity about what the future may realistically look like.
How Tees Law can help
At Tees, our expert legal advisers work to ensure a fair financial settlement so that future needs can be met within the available financial resources. We also work closely with financial advisers in our Wealth Management team where needed. They will ensure that any future financial planning considerations are taken into account so you both have a clear and realistic view of your financial future.
