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Valuing Pensions and Stock Options For Divorce Settlements
Valuing Pensions and Stock Options For Divorce Settlements
Dividing up assets like pensions and stock options during a divorce can be really tricky. There’s a lot of complicated legal and financial stuff involved that most normal folks don’t totally get. But it’s important to understand how these assets get valued and divided, because they can be worth a lot of money.
So in this article, I’m gonna walk through the key things you need to know if you’re going through a divorce and need to split up pensions or stock options. I’ll explain how the courts look at these assets, the different ways they get valued, and how you can get your fair share. My goal is to break it down into simple terms so you’ve got a good handle on what’s going on.
Pensions 101
Let’s start with pensions, since they’re pretty common. A pension is basically a retirement account through someone’s employer. The employee contributes money from each paycheck, which the employer usually matches. That money gets invested and grows over time. Then when the employee retires, they get monthly payments from the pension fund for the rest of their life.
There’s a few key things to know about dividing up pensions in divorce:
- In most states, pensions are considered marital property. That means they’re assets that were built up during the marriage, so they get split between spouses.
- Courts can use different methods to divide pension assets, which I’ll explain more below.
- To actually divide a pension, you need a separate court order called a QDRO (qualified domestic relations order). This tells the pension plan administrator how to split up the payments.
- The QDRO has to be carefully drafted by a lawyer who knows this stuff really well. Small mistakes can mess up your payments big time.
OK, now let’s talk about how pensions get valued and divided. There’s a couple main methods the courts use:
1. Present Cash Value
This involves calculating how much the pension would be worth in today’s dollars if you cashed it out now. The court will hire an actuary to run the numbers and figure out the lump sum current value.
So let’s say someone’s pension will pay them $2,000 per month at retirement. The actuary calculates the total current value is $250,000. The spouse would typically get half of that, so a $125,000 payout.
Pros: You get your share of the asset now instead of waiting until retirement. And you can invest or spend it however you want.
Cons: Calculating the present value can be really complex. And you lose out on future pension growth.
2. Deferred Distribution
In this approach, you wait until the pension starts paying out benefits. Then you get a percentage of each monthly payment based on how long you were married.
For example, say you were married for 20 of the 30 years the pension was building up. You’d get 20/30 = 67% of each monthly payment once your ex starts collecting the pension.
Pros: You don’t need to calculate a present value. And you share in the pension’s future growth.
Cons: You have to wait for the money and depend on your ex not messing up your payments.
3. Hybrid Approach
Some states allow a combination of the two methods above. For example, you could get half the present value now, and then also get half of each monthly payment later.
This balances the pros and cons of each approach. But it’s definitely more complicated to figure out.
Stock Options 101
Now let’s talk about stock options. These are a little trickier than pensions.
Stock options give employees the right to buy company stock at a certain price (the “grant” or “strike” price) after a set period of time. So if the market value goes up, employees can buy the stock cheap and make a profit.
Key things about dividing stock options in divorce:
- Like pensions, courts typically treat options granted during marriage as marital property.
- Valuing them is really complex because of vesting schedules, tax issues, and unknown future value.
- There’s different approaches to valuation and division, like with pensions.
- The court needs to issue a separate order to the employer on how to divide the options.
The most common ways to handle stock options in divorce are:
1. Present Value Method
The court calculates the current value of the options based on financial models like the Black-Scholes formula. This accounts for things like time until vesting, strike price, and stock volatility.
For example, say 100 options are worth $10 each right now based on Black-Scholes. The spouse would get $500 for their share of the options.
Pros: You get a clean break and can cash out your share now.
Cons: The valuation models aren’t perfect. And you lose out on future gains if the stock price keeps rising.
2. If, As, and When Method
Here you wait until the options actually vest and are exercised. Then you get a percentage of the profits.
For example, say you get 50% of any future profits. If your ex exercises 100 options for a $2,000 profit someday, you’d get $1,000.
Pros: You share in the actual future value whenever it happens.
Cons: You depend on your ex to exercise the options fairly and split the profits.
3. Hybrid Approach
Like with pensions, sometimes courts will give you part of the value upfront and part later on. For example, 50% of the current value plus 50% of future profits.
This balances getting something now with sharing future gains. But again, it’s more legally complex.
Whew, this stuff is complicated! But the key takeaway is that pensions and stock options are valuable marital assets. So make sure you get professional advice on how to divide them fairly in your divorce.
A lawyer experienced with these assets can help calculate the values, negotiate a settlement, and draft the court orders you need. An accountant or financial advisor can also provide input on valuation models and tax implications.
With the right help, you can make sure you split these complex assets properly and avoid getting short-changed. Pensions and stock options are an important part of the marital pie – so don’t let your ex take too big of a slice!
Useful Resources
Here are some useful links with more info on dividing retirement benefits and stock options in divorce: