Future Money, Present Division:

Handling Contingent Assets in Divorce

By Lauren Allen1

1 Lauren H. Allen is an associate at Adam W. Dietrich PC and practices all things family law. Lauren is a busy mom of three, a member of the inaugural Family Law Section – Leadership Class and has served on the Montgomery County Bar Association since 2017. Lauren can be reached at lauren@adtxlaw.com or 936-703-3127.

Texas divorce courts routinely divide assets ranging from the marital residence to personal property; however, as practitioners we should also be looking for con-tingent assets that have not yet fully matured or vested but should be factored into the division of assets. Because these contingencies have not fully matured, we must pay careful attention to (1) discover their existence, (2) characterize them as com-munity/separate property, (3) assign a value if we are able and (4) draft a final de-cree in an enforceable manner.

The early days of arguments to divide contingent assets began with pension benefits. Courts initially held that pensions that had not fully vested yet were not a fixed liability of the government to pay, were instead a “mere expectancy” and therefore were not com-munity property subject to division. See Cearley v. Cearley, 544 S.W.2d 661, 663 (Tex. 1976) (stating the history of contingent assets). Arguments that contingent assets are just a “mere expectancy” have severely weakened over the years. In Busby v. Busby, the Texas Supreme Court answered most objec-tions that could be raised. Busby v. Busby, 457 S.W.2d 551, 553 (Tex. 1970). Just because a right might be forfeited—either by death or a failure of condition—does not mean those contingencies divest the parties of their interest.

While it is now clearly established that pension benefits are community property to be divided, (1) we should make sure in our discovery requests we are searching for other potential contingent assets. Contingent assets we most commonly encounter are unvested stock options, bonuses, pensions, and future interests in oil and gas investments. To characterize contingent assets, (2) we start with the Incep-tion-of-Title rule to see if the asset was earned partially during marriage.

As an example, consider a yearly bonus paid based on the employee’s performance. The Texas Supreme Court recently confirmed that discretionary performance bonuses are community property sub-ject to division in a divorce, even when payment is contingent upon continued employment and has not vested, because the bonus is based on work performed during the marriage. In re J.Y.O., 709 S.W.3d 485 (Tex. 2024). Keep in mind that the employed spouse can claim a separate property interest in the bonus for the portion earned after divorce but must meet this burden with clear and convincing evidence. Tex. Fam. Code § 3.003. Once the bonus is properly characterized, the next step is to (3) value the bonus.

The foundational case, Cearley, established that deferred compensation is not “earned on the day on which [it] matures” but rather “is a form of deferred compensation which is earned during each month of [employment].” Cearley, 544 S.W.2d at 665–66. To value the bonus at the time of divorce, when pay-ment is uncertain or dependent on future conditions, requires a valuation formula that does not account for the spouse’s post-divorce work. Just like the three factors used to determine a spouse’s share of a defined benefit plan are (1) the community share, (2) the community extent, and (3) the value of the

retirement benefit. Boyd v. Boyd, 67 S.W.3d 398, 407 (Tex. App.—Fort Worth 2002, no pet.). The Berry Taggart formula works in dividing a contingent bonus as follows:

This formula protects the employed spouse’s future bonus earned after the date of divorce, and it is not dividing such separate property. Employed clients who believe the bonus is earned solely because of their continued employment or post-divorce performance should remember that their future employ-ment is not being divided; rather, it is the portion of work performed during the marriage that is subject to division. See Id. at 410. I believe this formula works for bonuses, but what about another common con-tingent asset—unvested stock options?

Unvested stock options constitute contingent interests and are community assets subject to division so long as the options were acquired during the marriage. Bodin v. Bodin, 955 S.W.2d 380 (Tex. App.—San Antonio 1997, no pet.). The fact that stock options are not fully vested at the time of divorce does not affect their character as community property. Boyd, 67 S.W.3d 398. However, the vesting schedule of the stock options is something that must be accounted for and valued in the divorce.

Valuing unvested stock options has many variables, one being the wording of the stock grant itself. In Boyd, the stock grant had a vesting schedule and was also dependent on whether the employer be-came a publicly traded company or acquired by a third party. Id. at 411. With stock options granted as part of a long-term employment compensation package, the stocks will be in flight and land/vest over a period of time but also remain subject to forfeiture at the employer’s discretion. The ability to exercise these stock options is contingent on different factors and to place a value on them at the date of divorce is difficult. The Boyd Court found the trial court did not abuse its discretion in placing a value as of the date of divorce on the contingent stock awards and wife was awarded a certain dollar amount. Id. at 412. That result could have been a big win for the husband based on contingencies occurring after the divorce which could have increased the value of his options by over 20 percent. For practitioners, it’s important to use an expert to not only help with the vesting schedule but also consider arguments about whether we place a value as of the date of divorce or craft other arguments as to why we might not want a value at all but go with an “if as and when received” award.

Once we know the identity, character and if we are able or want to place a value of the contingent asset, the last step is (4) to structure the division in the decree in an enforceable manner. It’s important to name the employed spouse as a constructive trustee for the award to the non-employed spouse be-cause that brings enforcement remedies. See Tex. Fam. Code §9.011. The award should provide for an accounting of the receipt of the contingent asset, contemplate tax liabilities, provide for a time, date, place and manner of delivery of the asset and clearly set forth the formula for valuing the asset if it is to be paid “if as and when” the contingency fully vests.