Preparing for Divorce During the Holidays: Making Smart Financial Decisions
Going through a divorce is emotionally taxing on its own, but when the holidays are added to the...
One of the questions I often encounter when working with clients going through a divorce and seeking creative solutions is how to handle bonus income in spousal support calculations. Bonus income can include cash bonuses based on performance or retention, or incentive-based that may include restricted stock units (RSUs) or performance stock units (PSUs), referred to as executive compensation. First, it’s imperative to work with an attorney to determine if there is a legal basis for the income to be subject to spousal support considerations. If it is determined to be included in the support conversation, then structuring how it will be paid out can be very important to both parties' future financial planning and oftentimes involves complex financial considerations.
Here are some key considerations when thinking about bonus income and spousal support.
When it comes to incorporating bonus income into spousal support, there isn’t a one-size-fits-all solution. How bonus income is structured into both parties' cash flow can significantly impact their financial stability after divorce. Therefore, thoughtfully creating a plan that reflects timing and net earnings while accounting for variability, predictability, and long-term budgeting needs is crucial. Below are some common approaches and considerations to help guide this process.
Defining Bonus Types and Continuity in Agreements
It’s important to clarify what kinds of bonuses are included in support arrangements: performance, annual, retention, new employment signing bonuses, stock-based awards (RSUs/PSUs), etc. Additionally, addressing future potential job changes or new types of bonuses for the payor allows for possible changes and helps ensure the agreement remains relevant and equitable over time.
Once you’ve decided how to structure bonus income in your support calculations, the next step is determining whether to base the split on gross or net amounts. This choice can have a significant impact on both predictability and fairness. Understanding the differences, along with the factors that affect each approach, can help ensure the arrangement works smoothly for both parties over time and minimize possible disagreements and future conflict.
Net Bonus Split:
Gross Bonus Split:
Even with a clear structure and a defined split, bonus income can be unpredictable. Taking the time to plan ahead allows both parties to anticipate fluctuations, align support with real expenses, and create a financial plan that supports long-term stability. Thoughtful planning can help prevent surprises and ensure the support arrangement remains workable as circumstances change. Choosing the right approach starts with mapping out your post-divorce budget and answering questions around the predictability of bonus income, whether a gross or net split better aligns with long-term financial needs, and deciding how fluctuations affect your ability to cover expenses and maintain stability.
Taking time to explore these questions with a financial professional can help you make informed decisions and reduce the likelihood of needing adjustments later. Thoughtful planning turns an unpredictable income source into a manageable part of your post-divorce financial picture for budgeting purposes. Contact us to learn more about modeling options and deciding the best way to address bonus income in Spousal Support.
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