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Ron L. Deal

This is deleted sections from chapter 10 of The Smart Stepfamily Revised and Expanded Edition by Ron L. Deal (Bethany House Publishers, 2014). Used with permission. All rights reserved.

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From the Pensions and Other Retirement Benefits section:

Two methods of dividing the Pension and Retirement plans are being used in these cases. One is to buy out the Pension holding spouse’s share by offering lump sum cash payment or making up the difference with other marital assets.

The second method is for the pension holder to pay the other spouse when they are actually paid by using a Qualified Domestic Relations Order or “QDRO”. This saves the Pension holder from having to pay before the pension is actually paying out.

The Qualified Domestic Relations Order may also allow the Pension holder to avoid all the taxes on paying a life time of pension income out to the ex-spouse and instead will require the spouse that gets the QDRO to pay the taxes as money is received in lump sum.

From the Stock Options section:

If you are awarded stock options during your marriage, most courts will consider those options to constitute marital property even if you do not actually exercise those options during your marriage.

This is still the case even if the stock options are not yet vested at the time of the divorce and you must hold them for more time before exercising.

Stock options, as valuable forms of “alternative compensation”, usually take one of two forms. This can be seen when people are willing to take lower cash forms of compensation in exchange for more remuneration in the way of these stock options.

In the event of an unforeseen divorce, courts usually must first determine what portion of the stock options was actually earned during the marriage. This could be somewhat complex because there are two forms of stock options: One is given as an incentive to work hard in the future and another as “thanks” for hard work done in the past. So it may be difficult at first to determine which type that the option is and therefore how much of the stock option is considered “marital property”. The courts may award completely opposite rulings based on their view of forward or backward looking options.

Courts will take the following into consideration when trying to determine how much of the options were marital property:

  • Were the stock options offered as a bonus or as an alternative to a fixed salary?
  • Where either the value or the quantity of the stock options tied to future performance?
  • Was the stock option plan used to attract key personnel from other companies?
  • What did the stock option contract specify with respect to the reason for the granting of the stock options?

Usually the answer to the marital property issue will conclude that part of the stock option was for work during marriage and part after getting married (or before). Some formula will be applied.

Then the courts must decide what the value of the option is! They may start by subtracting the strike price from the current trading price. But then the stock price could jump higher or lower at any point so this in itself may not be reliable. The most complicated formula used is the “Black-Scholes” formula which takes in to account the value and market price of the underlying stock, the exercise price of to options, the volatility of the underlying stock, and the amount of time left before the expiration date, and the current interest rates.

As if that were not complex enough the actual dividing of the stock options can also be a challenge. The "Option Holding spouse" may buy out the other spouse’s share of the options but this holder could end up overpaying or underpaying because the price of stock could change at any time.

Therefore, another method is for the holder to divide the options themselves and then the two of them agree that at any time after divorce the ex-spouse provides the holder with the funds necessary to buy or sell the stock at issue. The downside to this solution is that in this scenario the holder of option is liable for all of the taxes at exercise since stock options are typically nontransferable and nonassignable.

From the Professional Goodwill section:

In these situations, the only asset of any real value is the practice’s reputation and prestige. Though the practice might have a very low business valuation using traditional methods of valuation there are other ways to value in these cases. Yes, you can’t deposit in a bank your reputation but the goodwill value of the business ensures that the business will be profitable in the future.

Depending on the unique facts in each case and the state in which you live, the goodwill value of your professional practice may or may not be considered marital property. One method commonly used is the capitalization of excess earnings method. The earnings of your practice are compared to the earnings of an average professional in your field and geographical area, with experience, expertise, and education similar to your own. The difference in your earnings and the average earnings of a comparable professional is called your “excess earnings” and is then multiplied by a capitalization factor to arrive at a value for your professional goodwill. Therefore, it might be your best interest to consider a prenuptial agreement which outlines exactly how your professional goodwill is to be handled in the even of a divorce.

It is a mistake to think that a common “buy-sell agreement” will be enough which sets for the value for your practices’ professional goodwill. The courts do not “automatically accept the goodwill values set forth in partnership agreements when making decisions in a divorce. Your partnership agreement might provide that your practices’ goodwill is worth zero, for example, so the partnership will have to pay as little as possible if one partner decided to leave the practice. A divorce court, however, might still decide that your practices’ goodwill is worth several hundred thousand dollars, despite the provisions of your partnership agreement.

Spouses have certain automatic rights to one another’s estates. Thus your business assets might end up distributed completely different than your intentions without a Shared Covenant Agreement in place.

From the When to Start Planning section:

Together with your partner and a Christian trust and estate lawyer you will want to discuss:

  • How the Agreement affects all of your current and future property rights as well as those of your children and grandchildren from all marriages.
  • If the Agreement considers career sacrifices you may make during the marriage.
  • Agreements on college funding for his, hers, and “theirs” children. Who will be paying what amounts or percentages of the college bill? Is our philosophy the same for all of the children? What about advanced degrees? Keep in mind that all spouses including ex-spouses have assets and income that will be looked at for the FAFSA when college aid applications are made.
  • How to handle the support of elderly parents and other family issues involving long term care.
  • Specific guidelines on roles in the budgeting, asset management, and debt management for each spouse. Should accounts be joint, separate, and if so what amounts or percentages?
  • All current estate planning documents, their purpose, and who to contact (phone numbers, addresses of all key financial advisor team members, etc.) regarding each.
  • All business planning documents like the buy-sell agreement. Include in simple terms the intentions of owner-spouse.
  • Issues such as living wills, final illnesses, burial arrangements, and memorial services.