Employers want good employees to stay working for them. One way that employers can ensure that an employee will still be working for them next year or even five years from now is to offer them benefits which will vest in the future.

Employers will offer employees retirement benefits or stock options which will only vest after a certain number of years. Therefore, the employee will be tempted to remain at that employer in order to get actual ownership of the retirement benefit or stock option which they were promised.

Until that vesting condition occurs (usually a certain number of years), the employee doesn’t actually own the retirement benefit or the stock option.

If the employee leaves their employer before the benefit or stock option vests, the employee forfeits the benefit or stock option.

A retirement benefit has three stages, non-vested, vested and matured.

“An employee’s interest in a pension or profit-sharing plan is said to be “vested” if it is not forfeited by the discharge or voluntary retirement of the employee prior to retirement age.  A vested interest should be distinguished from a “matured” interest, that is, an unconditional right to immediate payment. An employee’s right to pension or profit-sharing benefits, for example, may vest after a term of service, but not mature until the employee reaches the age of retirement and elects to retire.” In re Marriage of Hunt, 397 NE 2d 511 – Ill: Appellate Court, 1st Dist. 1979

Stock options are merely vested or not vested. For stock options, “vesting” refers to the date upon which the stock option becomes exercisable. In other words, the option holder must wait until the option “vests” before he can purchase the stock under the option agreement.

What happens to a vested or non-vested retirement benefit or stock option in an Illinois divorce?

What If A Retirement Benefit Or A Stock Option Vests During A Marriage In Illinois?

To vest is “to confer ownership (of property) on a person.” Black’s Law Dictionary (11th ed. 2019)

A benefit which has vested is now 100% in the ownership of the person the benefit was targeted to.

Clearly, a vested benefit is a real asset which the employee owns and which could be distributed in an Illinois divorce…if that asset vested during the course of the marriage.

Only marital property can be distributed in an Illinois divorce.

An Illinois divorce court “shall divide the marital property without regard to marital misconduct in just proportions considering all relevant factors” 750 ILCS 5/503(d)

Marital property is property acquired during the divorce.

“‘[M]arital property’ means all property, including debts and other obligations, acquired by either spouse subsequent to the marriage” 750 ILCS 5/503(a)

“For purposes of distribution of property, all property acquired by either spouse after the marriage and before a judgment of dissolution of marriage or declaration of invalidity of marriage is presumed marital property.” 750 ILCS 5/503(b)

If the benefit or stock option was earned and vested before the marriage, the spouse with the vested benefit must keep that asset.

“[T]he court shall assign each spouse’s non-marital property to that spouse.” 750 ILCS 5/503(d)

But, if a retirement benefit was earned partially before the marriage and partially during the marriage, that retirement benefit may be partially marital.

“[T]he following…which is known as “non-marital property”:…property acquired before the marriage, except as it relates to retirement plans that may have both marital and non-marital characteristics” 750 ILCS 5/503(a)(6)

The marital portion of those vested benefits must then be calculated based on when those benefits were acquired.

“For purposes of distribution of property pursuant to this Section, all pension benefits (including pension benefits under the Illinois Pension Code, defined benefit plans, defined contribution plans and accounts, individual retirement accounts, and non-qualified plans) acquired by or participated in by either spouse after the marriage and before a judgment of dissolution of marriage or legal separation or declaration of invalidity of the marriage are presumed to be marital property.” 750 ILCS 5/503(b)(2)

The non-marital portion of the vested benefits must be determined as well.

“A spouse may overcome the presumption that…pension benefits are marital property by showing through clear and convincing evidence that the pension benefits were acquired by [proving they had a non-marital nature]” 750 ILCS 5/503(b)(2)

In reality, there’s not much argument as to the marital or non-marital portion of retirement accounts. There is only the date of marriage.

The parties will comply with at QDRO(Qualified Domestic Relations Order) which the retirement plan administrator will provide an example of. The only input is the date of marriage and the retirement plan administrator will calculate each spouse’s portion of the retirement account based on that date.

Vested stock options operate similarly to retirement benefits. If the stock options vest during the marriage, there is a presumption that the stock options are marital property and thus, divisible.

“For purposes of distribution of property under this Section, all stock options and restricted stock or similar form of benefit granted to either spouse after the marriage and before a judgment of dissolution of marriage or legal separation or declaration of invalidity of marriage, whether vested or non-vested or whether their value is ascertainable, are presumed to be marital property.” 750 ILCS  5/503(b)(3)

Then the spouse that earned the stock options will have to prove that a portion of the vested stock options were earned before the marriage and, thus, are not divisible.

“This presumption of marital property is overcome by a showing that the stock options or restricted stock or similar form of benefit were acquired by a method listed in subsection (a) of this Section.” 750 ILCS 5/503(b)(3)

There is no retirement plan administrator for stock options. You are going to have to do the math yourself. But, it is not rocket science.

For example, if you started work in 2015 and you were granted stock options which vested in 2020 but got married in 2018, it is safe to say that two of the five years spent earning those stock options were marital years and thus 40% of the stock options total value is marital and, thus, divisible.

What If A Retirement Benefit Or A Stock Option Does NOT Vest During A Marriage In Illinois?

Retirement accounts which haven’t vested are still treated as marital property even though the employee has no rights or control over those funds during the marriage.

“[A]n employee spouse’s contractual right to a pension or profit-sharing interest is “property” under section 503 of the Illinois Marriage and Dissolution of Marriage Actregardless of whether the interest is matured, vested or nonvested” In re Marriage of Hunt, 397 NE 2d 511 – Ill: Appellate Court, 1st Dist. 1979

Stock options earned during a marriage will be divided in an Illinois divorce whether the stock options have vested or not.

“For purposes of distribution of property under this Section, all stock options and restricted stock or similar form of benefit granted to either spouse after the marriage and before a judgment of dissolution of marriage or legal separation or declaration of invalidity of marriage, whether vested or non-vested or whether their value is ascertainable, are presumed to be marital property.” 750 ILCS  5/503(b)(3)(emphasis mine)

The problem is that if stock options haven’t vested, the stock option owner cannot transfer the marital portion…because they don’t really own the stock yet.

The Marital Settlement Agreement will have to acknowledge this incapacity to transfer the stock options at the time of the entry of the Judgment For Dissolution of Marriage. Arrangements will have to be made for the transfer to occur when the stock options actually vest.

This duty to maintain and transfer the stock options is referred to as a “Constructive Trust

“[A] constructive trust requires any other party who receives the…proceeds, but who has an inferior equitable right to them, to hold the proceeds solely for the vested beneficiary.” Perkins v. Stuemke, 585 NE 2d 1125 – Ill: Appellate Court, 4th Dist. 1992

What If Your Ex Screws Up Your Interest In Their Retirement Or Stock Options

A QDRO usually separates a retirement account or pension benefit right away so that neither spouse can affect the other spouse’s retirement.

Some pensions don’t allow for division, though.

A “spouse has a vested interest in his or her portion of those benefits as of the date of the court’s decree. That vested interest cannot be unilaterally diminished by an act of the pension holding spouse.” In re Marriage of Neilsen and Magrini, 792 NE 2d 844 – Ill: Appellate Court, 2nd Dist. 2003

In the case that a spouse’s not-yet-divided portion of a retirement benefit or stock option is diminished, forfeited or ruined somehow by the spouse with a responsibility to maintain that benefit or option…the wrongdoer spouse is going to be in big trouble.

Money is fungible. If your ex-spouse ruined some money-valued asset they were holding for you, you can just ask for the money from another source. The court can freeze the wrongdoer spouse’s other assets via constructive trust for eventual transfer to you.

“A constructive trust is created when a court declares the party in possession of wrongfully acquired property as the constructive trustee of that property, because it would be inequitable for that party to retain possession of the property…A constructive trust is generally imposed in two situations: first, where actual or constructive fraud is considered as equitable grounds for raising the trust and, second, where there is a fiduciary duty and a subsequent breach of that duty….Some form of wrongdoing is a prerequisite to the imposition of a constructive trust.” Suttles v. Vogel, 126 Ill. 2d 186, 193, 533 N.E.2d 901, 904-05 (1988).

In the case of an unvested stock option or retirement benefit, the most likely loss of that marital property will be if the employee loses their job before the vesting period.

If the employee loses their job due to being fired for cause, that is clearly a wrongdoing which would allow for a constructive trust to be imposed against their other assets.

If the employee loses their job through no fault of their own, then that was a shared risk the now-divorced couple took.

If the employee quits to pursue a better opportunity that was worth forfeiting the retirement benefits or stock options…your lawyer should have thought about that when negotiating the Marital Settlement Agreement. You cannot force someone in America to work since 1865. “Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.” U.S. Const. amend. XIII

If you or your spouse has some kind of asset which vests…you have real assets that need to be divided properly in your Illinois divorce. To discuss these assets, vested or not-vested, contact my Chicago, Illinois family law firm to learn what your rights are to which assets.