Valuing Stock Options & College Financial Aid Planning During Divorce

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1 Valuing Stock Options & College Financial Aid Planning During Divorce

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3 Equity Compensation Alphabet Soup ISO, NSO, RSU, SAR, ESPP Stock Options equity instruments providing the right to buy underlying stock at some future time Incentive Stock Options (ISO s) Non-Qualified Stock Options (NQ s or NSO s) Restricted Stock stock issued with some limitations typically regarding vesting and/or sale Restricted Stock Grants Restricted Stock Units Stock Appreciation Rights Employee Stock Purchase Plans/Programs stock purchased through payroll deductions, typically at a discount And that s just getting started.

4 Who s getting it? National Center for Employee Ownership estimates 32 million Americans own employer stock through ESOP s, equity compensation plans, ESPP s, and 401(k) s As of 2014, 19.5% of all private-sector employees reported owning stock or stock options in their company

5 Some local examples Stewarts, Adirondack Trust (ESOP) Apprenda, Merit, Momentive AMRI, GE, HD, KEY, PLUG, REGN

6 Where is this reported? Company Financial Statements W-2 / 1099 Personal Tax Returns Personal Company-Provided Account Statements Other?

7 What are some of the value issues? Past Compensation or Future Incentive? (DeJesus v DeJesus 90 N.Y.2d 643) Nelson Time Rule Marital or Separate Property? (Armstrong v Armstrong 72 A.D.3d 1409) Equitable Distribution Value and calculate payout/offset Exercise/sell and split proceeds Transfer equitable portion

8 Evaluating Taxes & Risk With Different Asset Classes Example: Couple is getting divorced. Husband works for Regeneron and wants to keep all of his stock options. He is considering giving the wife his 401K balance, joint brokerage account, and primary residence so he can keep all of his options.

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12 College Savings & Financial Aid Planning for Divorcing Couples

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14 EFC: Expected Family Contribution Save money in the parent s name, not the child s name Approx 20% of assets in the child s name count toward EFC Shelter for parent assets is typically $30K - $60K 529 Plans considered an asset of the parents Spend down the child s assets first UGMA & UTMA accounts Parents increase contributions to retirement plans during the determination year (taxable asset shift strategy) Does not lower income for EFC (counted as untaxed income ) Retirement assets excluded from EFC calculation BIG CHANGE AS OF : Prior-Prior Year Beginning 2017/2018 school year counted twice. Not Optional

15 Payoff debt to lower assets Pay down mortgage, credit cards, auto loans Minimize capital gains (treated like income) Ask grandparents to wait on gifting until after college is finished Trusts are generally ineffective at sheltering money from the needs analysis process and can backfire If you need to make major purchases, make them in the base year to reduce assets Certain types of property are non-includible. Cars, boats, computers, furniture, and school supplies, do not count as assets

16 Financial Aid & College Savings Strategies for Divorcing Couples Public College Financial Aid Looks At Custodial Parent: Who the student lived with for most of the determination year A step-parent who resides with the custodial parent will be treated by aid formula as if he/she were a natural parent It does not matter who claims a child as a tax exemption Siblings (including stepsiblings and half-siblings) can be considered part of the custodial parents household provided they get more than half of their support from the custodian parent(s) The vast majority of colleges will never even ask to see income or asset information from a noncustodial parent. No questions on FASFA form. The PROFILE asks for this information but it does not count toward the EFC (Expected Family Contribution). However, private colleges do request this information since they do not adhere to FASFA standards

17 College Savings & Financial Aid Some schools require financial information on former spouses in order to process the application. If former spouse refuses to provide information, it is sometimes possible to get a waiver for the college. Need to make a strong case to the admissions office. Time to bring out dirty laundry.. Large distributions from retirement accounts can significantly impact financial aid package. Balanced financial need with QDRO Penalty Free Window. 529 accounts are owned by the PARENT not the CHILD Shelter Inheritance or Non-Retirement Investment Account. Consider sheltering with a non-qualified annuity if it will increase financial aid.

18 QDRO and Cross QDRO Husband 401K $70,000 Wife 401K $70,000

19 Cross QDRO A divorce creates a one-time opportunity to withdraw assets from a qualified retirement plan penalty free. If a couple has a house that is underwater and their only assets are retirement accounts, a Cross QDRO creates a one time opportunity to free up assets to satisfy debt. Will normally only work with Defined Contribution Plans Alternative payees (spouses being paid under terms of QDRO) need to take the distribution directly form the plan to avoid the 10% early withdrawal penalty for individuals under 59½. IRC 72(t)(2)(C) If the TPA creates a separate account for the alternative payee within the plan for distribution purposes the alterative payee is treated as a terminated participant and does not receive the same in-service distributions and loan options available to participants in the plan. Work closely with TPA of plans to determine distribution options, identify loans against the account, and any restrictions.

20 Mandatory Fed Tax Withholding The Unemployment Compensation Amendment of 1992 (USCA) significantly changed the tax treatment of distributions from qualified retirement plans. Requires the plan participants be provided with a direct rollover option Imposes a mandatory 20% withholding on any eligible rollover distribution that the plan participant or alternative payee does not elect to have paid to another qualified plan or IRA.

21 Life Insurance Considerations Life Insurance is often required by a divorce decree to protect future streams of income. When life insurance is required pursuant to a divorce it is extremely important to make sure the beneficiary of the policy is also the owner of the policy. There are three parties identified in an insurance policy: Owner Insured Beneficiary The owners and the insured do not need to be the same person.

22 Life Insurance Considerations Dave and Sue are getting divorced. Dave is required to pay Sue child support for their three children and alimony for 8 years. These payments total $3,000 per month. The divorce decree requires Dave to maintain a $300,000 life insurance policy with Sue as the beneficiary. Dave has a $300,000 term insurance policy issued with himself listed as the owner and insured. Sue is listed as the beneficiary. Three years after the divorce Dave stops making payments on the insurance policy and the policy lapses. The only party that is notified when a policy lapses is the owner. Your client the beneficiary of the policy does not realize the policy has lapsed until the husband passes away a year later. There is no way to put the policy back into place and the person that she needs to sue has passed away. If there are no assets in his estate to place a lien against, the payments stop and there are no insurance proceeds to cover the lost income.

23 Life Insurance Considerations Due to insurability risk make sure the policy is in force prior to divorce being finalized Term Insurance typically carries the lowest premiums The face amount of the policy is influenced by a number of factors Amount of future expenses Duration of the future income payments Amount of other assets available to off-set future expenses

24 Life Insurance Taxation Since the life insurance proceeds are being used to cover future alimony payments are they taxable when received by the beneficiary? Answer: No. Life insurance proceeds were included in the gross income of the payee spouse until the Tax Reform Act of 1984 repealed IRC 101(e). The transferee spouse of the insurance proceeds is eligible for all IRC 101 exclusions, regardless of whether the proceeds are paid as a spousal support substitute. In addition, IRC 1041 provides for the non-recognition of gain or loss on the transfer of an insurance policy. Consequently, life insurance proceeds would be excluded from the gross income of a transferee spouse who received the policy during marriage or as a result of a divorce.

25 Disclosure Statement Investment Advisory Services offered through Greenbush Financial Group, LLC. Greenbush Financial Group, LLC is a Registered Investment Advisor. Securities offered through American Portfolio Financial Services, Inc. (APFS). Member FINRA/SIPC. Greenbush Financial Group, LLC is not affiliated with APFS or Valuation Resource Group, LLC. APFS is not affiliated with any other named business entity. Michael Ruger and Rob Mangold are a registered representatives with American Portfolio Financial Services, Inc. Information in this illustration has been obtained from sources believed to be reliable and are subject to change without notification. The information presented is provided for informational purposes only and not to be construed as a recommendation or solicitation. Investors must make their own determination as to the appropriateness of an investment or strategy based on their specific investment objectives, financial status, and risk tolerance. Past performance is not an indication of future results. Investments involve risk and the possible loss of principal. Any opinions expressed in this discussion are not opinions or views of American Portfolio Financial Services, Inc. (APFS) or Greenbush Financial Group, LLC. Options expressed are those of the presenter only. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non diversified portfolio. Diversification does not ensure against market risk. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.