To earn a bonus, you are likely to have put in a lot of effort and potentially extra hours at work. Understandably, we meet many clients who are worried at the prospect of having to share the fruits of their labour even after having separated from their spouse. Clients will often ask if they will have to share their bonus with their ex in a divorce.
To answer this question in short, and ever the lawyer response, it depends…
The Law
Section 25 Matrimonial Causes Act 1973 tells us what factors should be taken into account when deciding how money, property and assets should be shared out or distributed in a divorce. Material to the question of bonuses, is that the court would take into account “the income, earning capacity, property and other financial resources which each of the parties has or is likely to have in the foreseeable future”.
So, yes, a bonus would be taken into account.
However, each case is decided on its own specific set of facts. The law states that the court has to consider all the circumstances of the case and must give first consideration to the welfare of any minor children of the family. The Family Court applies the factors set out in law with the benefit of a broad discretion to decide on what the appropriate outcome would be to achieve fairness overall.
The process generally involves:
- computing what resources are available to the divorcing parties - meaning that the existence of, or expectation of, a bonus needs to be disclosed by the person who is or will be in receipt of it; and then
- distributing those resources – and here is where the outcome in relation to bonuses may differ.
A bonus already received
If you are already in receipt of the bonus and it’s sitting in your bank account then, to the extent it‘s not utilised towards day to day expenses, it will likely be taken into account as a capital resource. It’s akin to a pot of savings.
If savings were accrued or earned during the marriage, then they will be treated as marital in nature. Marital capital is generally subject to the principle of sharing, the starting point (but not necessarily the outcome) being to share equally.
If, however, the bonus was earned after separation, then it may be treated as non-marital in nature. Depending on other factors that apply, it may be retained without being shared. Note that reference here is to when it was earned, as opposed to when it was received.
Most of the time (but not always) it would be unrealistic to expect to retain a bonus in full even if it was earned after separation. It will depend upon whether the marital resources overall are sufficient to meet everyone’s needs – usually we are focusing on meeting both spouse’s reasonable housing needs and income needs. The principle of “needs” will trump all else.
In the majority of cases, all or most of the available capital resources are going to be subject to distribution between the parties on the basis of meeting “needs”. Needs is a concept that looks to ensure that each party to a divorce can, as far as is possible, meet their reasonable requirements for example to have a suitable home. Where there are children, the resources are more likely to need to stretch further to provide two suitable family homes.
If marital resources can be deployed to adequately meet both yours and your ex’s reasonable needs, and in addition to this you have a bonus in your account that was earned after separation, then it’s likely it will be treated as non-marital in nature and it would be considered fair for you to keep it.
Future Bonuses
Future bonuses are more likely to be treated as an income resource. Income resources are not shared on divorce per se, but again they are taken into account as a financial resource.
In some cases, one spouse may have a claim for spousal maintenance from the other, and in such a case we need to look at what resources are available to meet the claiming spouse’s reasonable income needs. This may have to take into account bonus payments. A difficulty can be that bonuses are often discretionary and may not be routinely payable in any certain amount, so it can be difficult to predict the vastness of income that will be available.
In a case in 2013, where one party’s income comprised of salary plus a sizeable discretionary bonus, a Family Court judge decided that it was appropriate to award maintenance so that both spouse’s basic income needs could be met from the regular salary payments, without recourse to the bonus. However, it was decided that the claiming spouse’s maintenance would then be “topped up” by receipt of a specified proportion of the bonus. To ensure fairness, and to make sure the maintenance did not exceed what was required to meet the claiming spouse’s “needs” as assessed by the Judge, the amount to be received from the bonus was to subject to a cap. This is an example, but the court has a wide discretion and the outcome will depend on all of the circumstances of the case.
Deferred Income
It can be an additional complexity where bonuses include a deferred element, such as shares or options. In these circumstances fairness might dictate that a maintenance award should not eat up a disproportionate amount of the liquid element. Careful consideration needs to be had, with specialist legal advice, to the negotiation of the maintenance award and the wording of any court order.
Not only this, but you must not forget to take advice to ensure the proper tax treatment of any bonus is accounted for, before allocating maintenance from the net amount received. We have an integrated Private Wealth team as well as specialist employment and corporate lawyers who can assist to ensure all relevant considerations are taken into account.
How to avoid sharing future bonuses
Where there is a need for a spouse’s income to be supplemented by maintenance and especially when the income it is being drawn from is uncertain or sporadic, which is a common feature where bonuses are concerned, it can be complicated. Often there will be a need for ongoing disclosure obligations and continual reassessment.
It may be possible to avoid there being any issue of sharing bonuses in the future, if you can negotiate a clean break. A clean break means there are no ongoing financial ties between the divorcing parties, and no ongoing maintenance payable.
A clean break isn’t just achievable where both parties earn enough income of their own, meaning that there is no maintenance claim. A clean break can be achieved when one of the parties is dependent upon additional income, by “capitalising” the maintenance claim. This is where the dependant spouse will receive a lump sum of capital or savings (if available) in place of monthly maintenance payments.
Care needs to be taken and both parties should take specialist legal advice to make sure that the negotiation of that lump sum considers all the necessary detail, meets the intended purpose, and that the wording of the court order adequately protects both spouses.
If you would like more information about dealing with financial claims in a divorce including how to negotiate appropriate maintenance provision, then please contact a member of our specialist family team.