The most complex support cases are those involving executive compensation, bonuses and profits generated by privately held businesses. Many executives are entitled to receive bonuses (discretionary or calculated) and incentive compensation in the form of restricted stock, stock options and appreciation rights, signing bonuses, forgivable loans, deferred compensation and nonqualified benefits (top-hat plans). These forms of income typically fall within the legal definition of net available income for support purposes. Business income also may be considered by the courts, whether paid to shareholders as draws or distributions or retained by the business as retained earnings. Pollock Begg attorneys have been involved in the most complex divorce cases involving executive compensation, bonuses and business income. We can help in guiding executives and their spouses to achieve their goals in high income support and divorce proceedings.
How are bonuses and executive compensation treated in divorce and support hearings?
Bonuses are included in the definition of income provided by the Pennsylvania support and divorce laws. The law specifically mentions “bonuses, fees, compensation in kind, commissions and similar items; income derived from business; gains derived from dealings in property; interest; rents; royalties; dividends; [and] distributive share of partnership gross income.” Figuring out whether to include these forms of income when calculating child support, alimony or spousal support requires at least two considerations: (1) Does the executive receive a personal benefit from the form of income; (2) Is the income actually available to the executive? If both questions are answered in the affirmative, the income is typically counted even if it is not actually received by the executive. For instance, the retained income of a business may be included under certain circumstances if the business has the ability to distribute its retained earnings and has no business purpose for retaining them.
Another factor that may be considered is the executive’s ability to force a distribution. A business owner who does not own a majority interest might lack the capacity to compel distributions. Under those circumstances, the court might delay or disregard a potential source of income not actually being received.
Some executives express concern about including bonuses in their incomes for divorce and support purposes when the timing and amount are uncertain. Often, bonuses are paid annually in the trailing year based upon the performance of the business and the executive in the preceding year. Some courts treat these bonuses as if they were part of an executive’s regular monthly compensation, which can increase the monthly support and alimony obligations. The experienced team of divorce attorneys at Pollock Begg has developed strategies for dealing with these concerns, particularly when they may affect the family’s cash flow and ability to meet household expenses.
What is ‘double dipping’ in divorce?
Some types of assets, such as pensions and rental real estate, can be viewed as either assets to be divided in equitable distribution or as income to be used in paying support and alimony. When a court attempts to treat a stream of income as both property and income, however, the owner of the income stream pays twice, which is called double dipping. In recent years, Pollock Begg lawyers have been responsible for developing case law on this issue, and now it is commonly recognized in Pennsylvania that our divorce courts may not commit double dipping in most circumstances.
There are, of course, exceptions to the rule, which must be well understood. If a source of income (rental real estate, for instance) is treated as income in one time period and property in another time period, no double dip has occurred. This is why pensions can be used as a source of income for paying spousal support, and then divided in equitable distribution. On the other hand, a double dip would occur if a pension is divided in divorce and drained as a source for paying post-divorce alimony.
Executives, business owners and their spouses face unique challenges in pursuing divorce and support litigation or settlements. Pollock Begg can provide guidance concerning the rulings of our Pennsylvania courts.
Call one of our family law attorneys to make an appointment and learn how our experience can help in resolving these complex issues.