Contrary to Parties’ Agreement, Exercised Stock Options are Considered Income for Child Support Purposes

In the case of In re the Marriage of Pratt, the husband, Murray, found himself paying a larger percentage of child support based on exercising his stock options.

The parties were married for nineteen years and had four children.  Their case was finalized by an agreement, called a Marital Settlement Agreement.  Murray agreed to pay $4,400.00 per month for 4 years.   Murray also had restricted stock and stock options available to him at a later time, and the parties agreed that this money would not be deemed income for child support purposes.Scales of justice

Under the terms of their agreement, Sharon was required to pay Murray the sum of $137,154.98 within 60 days of the judgment.  In order to come up with that money, she directed Murray to sell her share of the restricted stock and stock options, which amounted to $207,000.  As a result of selling the stock, his income showed an increase, and placed him in a higher tax bracket.

Three years later, Sharon remarried, and the maintenance automatically terminated.  Since the child support was rolled into the maintenance as one lump sum (unallocated maintenance), a new child support order needed to be determined.

When determining Murray’s net income, the court included the dividend income.  Murray argued that this income was a one-time payment to him, and he would never again earn the dividend income from those sources.  A one time payment can be considered income, although the “nonrecurring nature” of the payment may be a factor in how the trial court allocates the payment.  When a party’s net income consists of a nonrecurring payment, the trial court may consider a deviation from the Act’s support guidelines.  However, once the court set the guideline child support amount, Murray never asked the court for the deviation in support.  The Appellate Court reasoned that unless Murray asked for the deviation, he was basically out of luck now.

Murray next argued that he and Sharon had agreed that the stock options and restricted stock sales would not be considered as income to him.  The Appellate Court however found that this provision was against public policy and was therefore void.  They refused to enforce this provision of the agreement.  This ruling was particularly harsh, since the parties divided the restricted stock and stock options, with each receiving their share.  Then, when Murray cashes his shares out, and it generates income for him, he is obligated to pay her a percentage of the amount he received.  In cases like this, and based on this court’s ruling, it is imperative that you consider this scenario when receiving stock options.

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