June 2014 Archives

Employee Benefits and Divorce

Many companies compensate employees with stock awards, stock option, annual bonuses, and other such items.  To the extent these employee benefits, or even a portion of them, are attributable to employment by that company during marriage, then that portion is community property subject to division at time of divorce. Normally there is a vesting period for the incentive-type compensation of stock awards and stock options.  At time of divorce these items may be unvested, but they are still divisible as a part of the division of the community estate.  The spouse to whom these awards were made is under no obligation to continue employment at that company until after the awards have vested.  For that reason, it is not unusual for the non-employee spouse to consider taking a discounted amount of cash at time of divorce in exchange for the employee spouse's receiving 100% of the interest in the incentive awards.  If the options or stock awards are divided, there is a procedure for determining the community property portion of the awards, factoring out the time the employee spouse works for the company after divorce.  That portion is not divisible. Annual bonuses often are not paid until the first quarter of the year after they were earned.  The divorce decree can include provisions calling for the employee spouse to pay the established portion of the bonus to the other spouse when it is received.  This type of asset can also be divided pro rata to reflect whatever percentage of it is attributable to the portion of the year during which the parties were married.  For example, if a couple divorces at the end of October, then 10/12th of the bonus for that year will be community property subject to division when the bonus is paid. Federal income taxes must always be considered in the division of stock awards and options and bonuses, and all other types of compensation the employee spouse may receive for services rendered during marriage.  Provisions for the allocation of the tax obligation should be included in the divorce decree. Certain professions, such as insurance sales, yield income year after year for a policy sold during marriage.  Certain professions, such as personal injury law, may not produce income until a year or more after the work is done.  Even crops not harvested and sold until after divorce may result in income attributable to the community time, toil and effort of one of the divorced spouses, and thus divisible as community property.  The proceeds of a winning lottery ticket bought during marriage is most likely community property subject to division at divorce.  The possibilities are many.

What Happens to the Mortgage During a Divorce?

Divorce and Mortgage

Whichever of you or your spouse is awarded the family residence will almost certainly also be awarded the mortgage against it and ordered to assume all liability for payment on it moving forward.  Occasionally, the person receiving the property will also be ordered to refinance the mortgage to relieve the spouse of any future liability on it.  But, that is not normally done. The cost of refinancing can be high; the interest rate might be higher, increasing the amount of the monthly payment; the spouse receiving the residence might not be able to qualify, income-wise, for a new mortgage.  There are many reasons why courts do not usually order the mortgage refinanced. Commonly, the person not getting the residence will want it refinanced so it will no longer appear as his or her obligation on a credit report.  People are naturally concerned about the impact the old mortgage might have or their ability to buy another house.  Customarily, the spouse who gets the house will be ordered to sign a "deed of trust to secure assumption" as security for payment of the mortgage if he or she fails to timely make all the required payments on the mortgage.  This will protect the spouse not receiving the house as part of the property division at divorce, and enable him or her to obtain a new mortgage on a new residence after the divorce. If that is your situation, you can rest easier knowing that most lenders will be satisfied with being provided a copy of your divorce decree showing that your spouse was awarded both the residence and the mortgage and has signed a deed of trust to secure assumption of all of your obligations arising from the mortgage.  Thus, if your ex-spouse fails to fulfill the mortgage obligations, and the lender looks to you for payment, you can foreclose on the deed of trust and have the house sold to raise the money needed to pay off the mortgage and repay you any sums you may have advanced.

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