Why Golden Parachutes Are Tricky During Divorce

When people get married, they become part of each other’s lives and families. They are also bound by law, including those regulations that govern marital assets.

Because relationships can change, the risk of divorce in any marriage is 50-50. If it goes south, couples might be less likely to feel the brunt of the separation, especially in their finances, if they understand how marital property works.

Marital property is any asset acquired during a marriage—either by one spouse or with both spouses’ combined efforts. This includes real estate, investments, pensions and retirement plans, business interests, and personal injury awards stemming from car accidents or medical malpractice suits.

For divorce that involves high-net-worth individuals, experts in family law can also look into golden parachute plans.

What Are Golden Parachute Plans?

Golden parachutes are a type of severance package given to executives when they leave their company. The term “golden parachute” usually refers to the generous benefits and perks of these packages. These include:

• Cash payments
• Stock options or shares
• Continued health care coverage for a period after termination

The term, meanwhile, may have originated from an insurance executive who coined the phrase “the executive blues.” He mentioned that there was a way of getting oneself out of paying money into certain situations.

Golden parachutes were not widely used until 2003 when a newspaper article mentioned a golden parachute plan that detailed how companies use it to encourage executives to leave their company for another one.

The golden parachute is considered the biggest severance package companies offer. In fact, many executives landed on the pages of these papers for receiving a multi-million-dollar golden parachute.

In 1998, the former CEO of Blue Cross and Blue Shield received a whopping $2.8 million severance package when he resigned. Former CEO of AMD Dirk Meyer also took home $12 million even if the board let him go.

divorced couple

Why Do Companies Give Golden Parachutes?

Golden parachutes are controversial. Some argue that these plans are unethical because they give executives the incentive to make short-term decisions rather than long-term ones. They can also leave companies vulnerable to mismanagement. Lastly, not all big businesses are in a stable or good fiscal position. Awarding millions to these top people might drain the coffers and demotivate the rest of the team.

On the other hand, golden parachutes have been used as incentives for employees. Companies may still provide them to high-level executives—regardless of whether they retired, resigned—or are terminated, for the following reasons:

• Helps ensure loyalty from high-level employees who might otherwise stay at the company if they did not receive any compensation upon termination
• Calms shareholders by demonstrating how confident management is in its decisions despite potential backlash

Golden Parachutes and Divorce

During a divorce, couples need to distribute their assets based on the principles the state uses. They can be for equitable distribution or see these assets as community property. There are differences between both.

When a state like New Mexico follows the community property law, couples will receive 50-50 shares of their assets acquired during the marriage regardless of whether they generated these by themselves (or alone) or together.

When it is equitable distribution, the court helps decide how assets will be allocated between parties. The share, therefore, may not be 50-50. Instead, it will be according to what the law considers fair and just based on the situation.

The biggest concern with golden parachute plans concerning divorce is that they are usually deferred income or unearned revenue. The benefits are already there, but they are not realized until later.

What happens then if a high-net-worth executive decides to leave the company and, therefore, receives the golden parachute package right after divorce? How would couples account for this?

The distribution of assets in this case now becomes tricky. The couples and lawyers need to determine whether the golden parachute plan has been “earned” during the marriage or not. Is there a part of the package that can still count as a marital asset?

It becomes even more complicated when some benefits under the golden parachute plan have been invested, which means tax may be deferred (or realized later). Tax rules can still affect the value of the assets.

Some couples decide to divide the assets by themselves. This strategy may not work among those who have considerable and complex assets individually or jointly. Rather, they can benefit from the guidance of family lawyers who specialize in high-net-worth divorce.

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