Whose Bonus Is It? – When May a Bonus Received After the Marriage Form Part of the Marital Estate?
For many couples, a spouse’s bonus is both a sign of an employer’s appreciation for the employee-spouse’s hard work and a significant portion of his or her total annual compensation. Because bonuses are often not paid out until months or years after entry of a divorce judgment, divorcing couples often ask the question – Whose bonus is it? Is a bonus part of the marital estate, divisible at settlement, or separate property, payable solely to the spouse who earned it through hard work?
The truth is that question does not have a straightforward answer, mostly because there is no such thing as a standard bonus agreement. Bonuses may come in the form of annual bonuses, retention bonuses, quarterly or monthly bonuses related to defined sales metrics, restricted stock options, and contingent awards based upon a successful IPO or sale to private equity, just to name a few. The type of bonus at issue in a particular case will have a substantial impact on whether it is marital, separate, or a mix of both.
Before turning to the specific factors in our analysis, it will be helpful to define marital and separate property. Marital property is any assets or debts that accumulated during the marriage through the effort of the parties. In other words, any assets or debts that accumulated during the marriage will generally be marital property, except for gifts, inheritances, and certain types of personal-injury claims attributable to one spouse. Conversely, separate property is any assets or debts that a spouse brought to the marriage or earned following the dissolution of the marriage. With certain exceptions not relevant to this discussion, each spouse is entitled to sole possession of his or her separate property while the marital property is split between the couple.
Given those definitions, courts making determinations as to whether a bonus is marital property or separate property must determine the present value of the expected bonus to the employee-spouse at the time the divorce judgment is entered.
Sometimes, this question involves a highly complex factual situation with a wide range of potential outcomes. For example, Jane Smith is a sales manager at a local software corporation. Prior to filing for divorce, she signed a management ownership plan award outside her existing employment agreement. The award provides that it has been granted based upon Mrs. Smith’s excellent performance over the past 10 years as a sales team member then manager and expectation of continued excellence. The award grants her restricted stock options in 1,000 shares of stock vesting annually that may be exercised beginning two years in the future at a discount from market price. For the award to continue to vest, Mrs. Smith must remain employed and meet defined sales metrics, and the company must meet defined profitability goals and remain under its current ownership group.
What percentage of this award is marital?
This hypothetical has no “right” answer and raises a series of questions that need to be answered for a court to determine what percentage of the award qualifies as marital property. To value this award, courts will ask:
- What percentage of the options have vested during the marriage?
- How much control does Mrs. Smith have over meeting the sales metrics in the award? Or the company meeting its profitability goals?
- How many years in the past has Mrs. Smith met the metrics in the contract?
- How might current market conditions affect the award?
- Is this award for past service or future performance? Both?
- How frequently has the company met the defined profitability goals in the past?
- What is the likelihood that the company will be sold before the options can be exercised?
Given this fact pattern, the need for an experienced family law attorney is obvious.
Even some situations that appear straightforward may not be. For example, John Smith is an executive at a local automotive manufacturer. His contract states that he will earn a year-end bonus of $10,000 to $40,000 depending upon his rating in an annual performance review. Some courts may simply apply a bright-line rule that this bonus is marital property in proportion to the percentage of the year that the parties spent married then split the marital portion evenly. If the judgment in our example were entered on September 30, a court applying the bright-line rule would find this bonus to be 75% marital property and 25% separate property.
Total Bonus: $40,000
75% Marital Property: $30,000 (to be split evenly between the parties)
25% Separate Property: $10,000
Total Portion of Bonus to John Smith: $25,000
Total Portion of Bonus to Spouse: $15,000
However, family law courts are courts of equity meaning that a court’s ruling must be fair, which does not always mean equal. Given that directive, some courts may look to other factors to determine both the marital portion of the bonus and the relative percentage granted to each party, such as hours worked, the existence of a busy season, relative income, earning potential, size of the marital estate, length of the marriage, cause of the divorce, financial need, misconduct by a party during litigation, or some other factor particular to the case. This analysis may end in the bright-line rule described above or it may not.
No matter the outward complexity, bonus determinations are highly fact specific and obtaining high-quality advocacy from a knowledgeable family law attorney matters greatly to the outcome of each case. If you have questions about this post or any other post on the Family Law Advocate Blog, please contact a family law attorney to assist with issues related to your divorce.
Categories: Distribution, Divorce
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