Unvested Stock Options: What Constitutes “Double-Dipping?”

May the calculations for alimony payments include a spouse’s unvested stock options, particularly if those options were not considered to be part of marital property for purposes of equitable distribution? This question was recently answered by the Massachusetts Supreme Judicial Court. In Ludwig v. Lamee-Ludwig, the Court said yes. [1]

At issue was a practice colloquially known as “double-dipping,” which brings up “the seeming injustice that occurs when property is awarded to one spouse in an equitable distribution of marital assets and is then also considered as a source of income for purposes of imposing support obligations.” [2] As an example, double-dipping would occur where a party’s unvested stock options were divided equitably during the divorce, and later, when vested, counted as the party’s income for purposes of calculating alimony payments.

In the case at hand, the parties were divorced in 2014. Under their separation agreement, the wife was awarded alimony based on a portion of the husband’s annual base salary, and also awarded additional alimony based on a sliding-scale calculation of the husband’s bonuses and other forms of compensation. The trial court applied “the time rule” to this case: this rule considers the number of unvested options, as well as the length of time the employee spouse has owned those options PRIOR to the dissolution of the marriage.

The Court noted that because the trial judge did not consider the unvested stock options as part of the marital property to be divided among the parties during the divorce, no double-dipping occurred. “Here, there is no such injustice because the contested shares were not part of the equitable distribution of assets; by operation of the time rule, they were assigned to and retained by the husband outright.” [3] The source of property assignment only included options which were attributable to the marital partnership, and did not include stock options which were given for post-marital efforts. Therefore, the Court noted, those unvested options could be considered income for alimony calculation purposes.

Interestingly, the Court also pointed out that the practice of double-dipping is not prohibited as a matter of law—it may be done, so long as the trial judge considers the equities of each situation.

 

 

[1] Ludwig v. Lamee-Ludwig, No. 15-P-1177 (October 17, 2016-February 7, 2017).

[2] Id., at 5, quoting Champion v. Champion, 54 Mass. App. Ct. 215, 219 (2002).

[3] Id., at 5.

Is a Trust Interest Part of the Marital Estate Under Massachusetts Law?

This question was recently answered by the Massachusetts Supreme judicial Court in Pfannenstiehl v. Pfannenstiehl, decided in August 2016.  This case is extremely helpful for divorce practitioners dealing with trusts because the court explains the application of the law to a variety of trust concepts, such as spend thrift provisions, irrevocable trusts, ascertainable standards, all of which may be making your head hurt as you read this sentence.

Ultimately, the court concluded that whether a trust should be distributed as “marital property” depends on whether the trust benefit is speculative or alternatively whether it’s sufficiently certain.  We will dive deeper into this analysis but essentially, the specific language of a trust must be analyzed to determine whether a spouse’s benefit due to one of the spouses should be considered part of the marital estate.  Generally, if the benefit is so speculative that it is difficult (or impossible) to determine whether the spouse will actually get it sometime in the future, it probably will not be considered part of the marital estate. If, however, the benefit can be determined by some sort of ascertainable standard, then it more likely will be part of the marital estate and divided through equitable distribution.

This particular case was pretty fascinating because the husband and wife, without the existence of the trust, live a not uncommon upper-middle class lifestyle.  The husband works for a family business, making about $190,000 a year.  The wife worked part time as an ultrasound technician earning about $20,000 a year. She additionally received a few thousand dollars a year in rental income that was solely in her name.  The parties have two children, one of whom has down syndrome, and so the wife seems to have tended more to the children.  While they made a good living, the lifestyle they lived was significantly higher because of the husbands benefit from a family trust.

In 2000 for a trust was established by The husband’s father, funded by the father’s businesses, life insurance policies, and a cash account.  The trust was irrevocable, meaning that the husband’s father wasn’t unable to dissolve it and take his money back. The beneficiaries of the trust were a class of people, of which the father was one of 11. Basically, the class was made up of all the husband’s father’s descendants.  There were two co-trustees Who essentially had complete discretion on distributions. There was also a spend thrift provision which protected the beneficiaries from their creditors standing between them and their benefit.

In this particular case, the SJC found that the husband’s interest was too speculative to be included in the marital estate.  That is pretty significant because the trial court had valued the husbands interest at over $2.2 million.  The court found that because it was within the sole discretion of the trustees to distribute funds to the husband, it was speculative as to whether he would receive anything further in the future.  That speculative nature didn’t, notably, mean that the court could not consider the trust interest in the equitable distribution, only that the court could not distribute that interest as part of the marital estate.  The court also notably found that, although it had dispensed with an award of alimony, the court could reconsider that issue and potentially award alimony considering that trust interest would not be distributed as part of the marital estate.

So what does this all mean in plain terms? It means that if a trust benefit, like income from from a trust, can be determined and defined, it can generally be distributed as marital property. If it’s unclear whether the spouse will receive a trust benefit in the future, it would be too speculative to be part of the marital estate. In that situation, the court can still properly consider the interest, including the likelihood of a party receiving it in the future, when the court distributes the rest of the estate. The likely result is that, where it seems likely a party would get a sizable benefit in the future, although it may be speculative, the court would be more prone to giving the other spouse more of the marital estate.  Same deal with alimony. Although a trust interest may be too speculative to give to either party, the court can consider the likelihood of the expected income in awarding alimony.  So in this case, I’d imagine the trial court, when they get the case back to figure it out, will give more than half of the remaining marital estate to the wife to account for the likely benefit the husband will receive from the trust.

This case did a very good job of illustrating the vast discretion of the court, while defining the boundaries of the marital estate. Really, the overall finances of the family are always to be considered by the court. While the court can’t distribute something that is too speculative, the court can do other things to balance the speculative nature of an interest and whether one spouse will likely receive it.  There were many lessons from this case and we will continue to discuss it on this blog.

Once again the complexity in family law cases is illustrated by the Supreme Judicial Court.  And when financial issues become complex, having a great divorce lawyer becomes essential.  If you have trust interests at issue in your case, consider scheduling a free consultation with our team of divorce attorneys.  Schedule yours today by calling 978-225-9030 during regular business hours, or complete this contact form and we will contact you back at our earliest opportunity.