Dividing a home or savings account during divorce can be hard enough. But what happens when part of your income comes from company stock?
You may have stock options that you haven’t exercised. Or perhaps your spouse receives restricted stock units (RSUs) as part of their compensation. These perks may not be typical assets, but they can be very valuable.
So how does New Jersey treat stock options in divorce?
Stock options and RSUs may constitute marital property in New Jersey. That means your spouse could have an ownership interest in part of the value of the shares even if they are not vested.
But the answer isn’t always clear. Courts will consider the time of the awards, the employer’s intent in making them, and their connection to the marriage.
Having this information can assist you in making informed decisions as it pertains to your financial future.
Understanding Stock Options and RSUs
Some companies give employees stock options or restricted stock units (RSUs) on top of their regular compensation. The perks can become more significant as the stock price of the company increases.
RSUs and stock options are two different things, although both are about shares of the company.
Stock Options
Stock options allow employees to purchase stock at a predetermined price. This is known as the strike price.
Let’s say your employer allows you to purchase 500 shares at $20 each. A few years later, the stock price is $50.
Those shares are now worth $50, but you could buy them for $20. That leaves a possible gain of $30 a share before taxes and expenses.
Of course, stock prices don’t always go up. If the stock falls below $20, those options may not be worth it to exercise.
Employees also generally have to complete specific conditions before they may exercise their options.
Restricted Stock Unit (RSUs)
RSUs are a little different. Employees do not purchase shares, they get them when certain requirements are met.
For example, an employer might give 1,000 RSUs over four years. If the employee satisfies the vesting conditions, they will be granted 250 shares per year.
Unlike stock options, RSUs generally do not require an exercise payment.
But there is a hitch. If the employee leaves the company or fails to meet certain conditions, the unvested shares may be forfeited.
These differences matter at the time spouses plan to divide their assets.
Are Stock Options in Divorce Marital Property?
Under New Jersey law, stock options in divorce may be treated as marital property.
But that doesn’t mean that half goes to each spouse. Courts evaluate a variety of variables in determining how to equitably split marital assets.
Under N.J.S.A. 2A:34-23, courts may divide property acquired during the marriage.
Most people think of marital property as houses, cars, bank accounts, and retirement savings. But employee stock awards can also qualify.
Let’s say your spouse received stock options while you were married. Those options may have been part of their pay for work performed during the marriage.
In that situation, you may have a claim to part of their value.
The harder question comes when the employer grants or pays the compensation near the end of the marriage.
How the Divorce Filing Date Affects Ownership
The date someone files for divorce can affect which assets belong to the marriage.
In New Jersey, the date you file your divorce complaint is usually the date when the period for acquiring marital assets stops.
But stock awards don’t necessarily have a linear path.
Let’s say your spouse was awarded 800 RSUs in January of 2024. They were planned by the firm to vest over four years.
Then, you filed for divorce in June 2026.
Some shares have already vested. Others won’t become available until 2027 or 2028.
Does that mean you have no claim to the remaining shares?
Not necessarily.
The court could consider whether your spouse received those prizes due to work done during the marriage.
If so, some of their worth may still be “marital property.” But rewards given for future work can be treated differently.
Stock Awards Granted Before Marriage
Stocks given prior to marriage may be separate property.
However, the grant date doesn’t always tell the whole story.
An award received before marriage might have a vesting period that extends into the marriage. The court may need to examine what work the award rewards.
Likewise, an award granted during marriage could relate to future employment.
The court may need to determine how much of the award belongs to each period.
Can You Split Unvested Stock Options?
Another issue in dividing stock options in a divorce is grants that have not yet vested.
“Unvested” signifies the employee has not met all of the conditions necessary to earn or exercise the award.
For example, the company may require two more years of employment.
But that does not mean the award is automatically out of the divorce.
A New Jersey appeals court recently addressed this question in M.G. v. S.M., 457 N.J. Super. 286 (App. Div. 2018).
This issue included restricted stock awards that were to vest after the divorce complaint was filed.
The court emphasized that awards made during marriage are often deemed to be marital. However, an employee may show that an award compensates future work.
That distinction is important because the same vesting schedule can serve various goals.
The Purpose Behind Stock Awards
Two employees can receive similar stock awards but face different outcomes during divorce.
Consider these situations:
| Employee A | Employee B |
| Receives RSUs for strong performance during the past year. | Receives RSUs as an incentive to stay another five years. |
| The shares vest after the divorce filing. | The shares also vest after the divorce filing. |
| The award rewards work already completed. | The award rewards continued future employment. |
| Some or all shares may qualify as marital property. | Some or all shares may be excluded from marital property with sufficient evidence. |
Both employees received shares that vest after their divorce filings. Yet the reason for each award could lead to different results.
For Employee A, the shares reward work performed during marriage. So, the unvested status doesn’t necessarily remove them from equitable distribution.
Employee B’s prize is for another reason. If the firm gave it to the employee as an incentive for future employment, the employee may be able to argue that it is not part of the marital estate.
But the employee must have some proof of it.
The court may also consider grant letters, employment contracts and representations of the employer’s intent.
It is not sufficient to only point to a future vesting date.
Therefore, the purpose of the award may be more important than when the employee receives the shares.
Division of Stock Options in a New Jersey Divorce
The division of stock options in a New Jersey divorce usually involves identifying, valuing, and dividing the marital portion.
Each step can become complicated when the employee receives multiple grants or the stock price changes.
Deciding What’s Fair
New Jersey courts examine a number of considerations when splitting marital property.
N.J.S.A. 2A:34-23.1 sets out the factors the courts consider, including the length of the marriage, income and earning ability of each spouse. They will also examine property possessed before marriage, contributions made by each spouse, marital assets and debts, and tax repercussions.
Fair allocation of stock options doesn’t always entail a 50/50 split. The court looks at the total financial picture of the couple to assess what is equitable.
A $100,000 Stock Award Isn’t Always Worth $100,000
Imagine your spouse receives 2,000 RSUs during the marriage.
At $50 per share, the award appears to be worth $100,000.
You might assume your share should be $50,000. However, the actual division may look very different.
First, only 1,000 shares have vested. The remaining shares depend on future employment.
Then the court has to ask itself why the business issued such unvested shares. Some may reward future work, not marital effort.
Taxes matter too. Even if the entire award is marital property, there may not be $100,000 left after taxes.
Lastly, the stock price may move before the other shares vest.
A settlement based solely on today’s share price could miss the point.
Hence, the perceived value of an award is not always the amount available to divide.
RSUs in Divorce: How Shares Are Divided
Handling RSUs in divorce can be difficult because shares often vest over several years.
The employee may receive new awards each year, with each grant following its own schedule.
That means a single compensation statement may contain several awards with different conditions.
When Employment Ends Before Vesting
Settlements with restricted stock units can get complicated when employment shifts.
Many organizations require employees to stay employed until their RSUs vest.
The firm may cancel any unvested rewards if you quit or are terminated by the company.
Suppose a couple agrees to divide 400 RSUs when they vest. Before that happens, the employee leaves the company and loses those shares.
What happens to the former spouse’s share?
That depends on the divorce agreement and the circumstances.
A well-drafted settlement should address this possibility.
It should also explain what happens if the employer changes the vesting schedule or cancels an award.
Otherwise, the couple could face another financial dispute after the divorce ends.
Factors That Determine Stock Option Value
Divorce doesn’t necessarily make valuing stock options as straightforward as looking at a brokerage account.
Unlike cash, stock options can vary quite a bit in value.
There are a number of things involved.
The Company’s Stock Price
The potential value of an option depends on the current share price.
If shares are trading above the exercise price, you can exercise the option and make a gain.
But tomorrow’s share price is not necessarily today’s share price.
If the market falls sharply, the value could be less by the time the employee exercises the award.
The Exercise Price
The exercise price determines how much the employee must pay to purchase shares.
Suppose your spouse owns 1,000 options with a $30 exercise price.
If the company’s stock trades at $50, those options have $20,000 in immediate exercise value.
However, that figure doesn’t account for taxes, fees or other valuation factors.
Time Left to Expire
Stock options don’t last forever.
Most of them expire after a period of time, whether the employee utilizes them or not.
A choice that has a few years left may have more potential worth than one close to expiry.
The remaining term can be important even when the option has no immediate exercise gain.
Market Developments and Company Shortcomings
The value of stocks may fluctuate during the course of a divorce action.
For example, an award of $100,000 at the beginning of a case may be worth a lot less at settlement.
Private business stock might create other concerns, such as the lack of a market price.
Some corporations also limit the times employees can sell their shares.
These characteristics can make professional valuation beneficial, particularly in high-asset divorces.
A settlement must provide for how the parties will deal with changes in value.
Dividing Stock Options in Divorce: Methods and Challenges
This can help both parties move forward without sharing future stock payments. The challenge is making sure the exchanged assets have comparable values.
How to Divide Stock Options
Couples have numerous alternatives for dividing stock options, depending on the value of the awards, the workplace rules, and the couple’s financial situation.
1. Split the awards later
In certain cases, spouses agree to split the marital share when the rewards become available.
For example, the employee may keep the stock options until they are exercised. The parties then split the agreed proceeds.
This technique can operate where the future value of the reward is unknown.
But the settlement must clarify how to deal with taxes, deadlines, and canceled rewards.
2. Swap Equity for Other Assets
One possibility is to have one spouse retain the stock awards.
The other spouse receives more of another marital asset, such as home equity or savings.
This lets both parties move forward without having to share future stock payments.
The trick is to make sure the stuff you give and get has about the same worth.
3. Agree on Cash Payment
Or the couple may agree on a predetermined cash payment of the marital portion.
This may help to settle and prevent future financial entanglements. But the size should be commensurate to the value of the stock award, tax effects, and potential dangers.
4. Assignment of future earnings
Some couples prefer to divide the proceeds on vesting of an award or execution of an option.
This can be useful when the future value of the stock is difficult to forecast.
Both spouses can share some of the financial risk.
But the agreement should spell out how much each spouse will get and when payments will be given.
Challenges When Dividing Stock Options
Dividing stock options can be complicated if the company restricts transfers or if one spouse controls the timing of the sale of shares.
Employer Transfer Restrictions
Many employers restrict direct transfers of stock options or RSUs.
That doesn’t mean the marital portion has no value.
Instead, the employee may keep the award and pay the former spouse later.
A cash offset may also work.
Before choosing a method, the couple should review the employer’s stock plan.
Otherwise, the settlement could require a transfer the company won’t allow.
Control Over Stock After Divorce
This can become a concern when one spouse retains the awards but must share future proceeds.
For example, suppose your former spouse keeps 1,000 stock options. Your settlement entitles you to a percentage of the marital portion.
The options become exercisable, but your former spouse decides when to exercise them.
What happens if they delay exercising the options while the stock price changes?
Or what if they let the options lapse?
Such judgments may lead to disputes without defined settlement terms.
These issues can be covered in a divorce agreement, which sets forth notice requirements, exercise deadlines, and payment procedures.
It may also require the employee to produce records when options are exercised, or shares are sold.
These stipulations allow both the spouses to know what they have to do.
They can also lessen the possibility of conflicts over future stock transactions.
The Tax Impact of Stock Division
Taxes might be a big consideration when splitting up stock options in a divorce.
Two assets may appear identical on paper but provide differing after-tax cash flows.
Stock options and RSUs are also taxed differently.
Taxing on RSUs
RSUs generate taxable wage income at vesting and settlement.
For example, if an employee gets 200 shares valued at $100 each.
The employee may be provided up to $20,000 in taxable remuneration.
But that doesn’t mean the employee takes home $20,000.
Income taxes and withholding can eat into your take-home pay.
Taxation on Stock Option
The tax treatment depends on the sort of stock option you have.
Nonqualified stock options often involve taxable remuneration at exercise.
There are distinct laws for incentive stock options, and they may cause alternative minimum tax problems.
These variations can alter the actual dollar worth of the prize.
Importance Of The After-Tax Value
Imagine you and your spouse are splitting up two assets.
One is a $50,000 savings account. The other is stock compensation of $50,000 before taxes.
Those assets might not have the same financial benefit.
If the stock compensation is taxable, the recipient may be left with less after taxes.
Judges in New Jersey can consider the tax consequences of dividing assets in divorce cases.
Before closing, you might review the expected tax effects to avoid a bad deal.
Can Stock Options Affect Alimony?
Stock options can impact more than property division.
They can also be relevant when courts are looking at a spouse’s income for alimony.
For example, an employee could earn $150,000 in salary plus annual stock awards.
Those rewards could be a substantial part of overall compensation.
If they are not considered, the court may have an inadequate picture of the employee’s profits.
But alimony and equitable distribution of stock options are for distinct purposes.
The split of property includes marital property. Alimony is based on financial support.
Courts have to assess how the compensation has been treated.
Avoiding Double Counting
Double counting can arise when a court divides an asset and then treats the same value as income.
New Jersey law includes limits on using certain distributed assets when setting alimony.
Still, the rules depend on the compensation involved.
For instance, new stock awards for future work aren’t necessarily the same as an already divided marital asset.
The court may need to examine when the income was earned and whether it was previously distributed.
This is one reason stock-based compensation requires careful financial review.
Documents That Help Establish Stock Ownership
The division of stock options in a New Jersey divorce isn’t always easy to find on a bank statement.
Employment records can demonstrate when Awards were issued, why they were offered, and if they were made available.
Useful documents are:
- Stock option contracts
- RSU award letter
- Employment Agreements
- Stock Vesting Schedule
- Statements of compensation to employers
- Equity plan documentation
- Recent W-2s and pay slips
- Tax Filings
- Statements of brokerage accounts
- Records of options exercised
- Records of awards granted or lost
- Employer communications regarding equity compensation
An example is if your spouse has a number of RSU grants with different vesting dates.
Other grants may be available that are also valuable, but focusing on one might lead to missing out on other opportunities.
Both spouses need to be truthful in disclosing all their financial information during the divorce process.
A lawyer can ask that missing documents that are crucial be provided in the legal discovery process.
Protecting Your Share of Stock Compensation
Stock compensation can be a useful asset in a marriage. But uncertainty over vesting, taxes, and valuation might lead to costly judgments.
Knowing a few things, you can go into the process with more confidence.
Consider The Entire Compensation Package
Don’t just look at shares that are already vested.
Please provide a detailed history of stock options, RSUs, and other equity awards.
Confirm the date, terms and exercise price of each award.
This can give you an idea of what type of compensation might be available for division.
Consider Future Risks
Stock prices fluctuate. People abandon employment. Some awards never vest or expire.
These dangers come when you are choosing between a cash payment and a future payout of your share of the estate.
For instance: a fixed payout offers certainty. There is more upside in future proceeds sharing, but also more risk.
What you should do best depends on your money situation.
Make the Agreement Specific
The divorce agreement should list the prizes to be shared.
It should also state the percentage for each spouse, the dates of payment, the taxes, and the conditions for future vesting.
The agreement should outline what happens if the awards lose value or become cancelled.
A Monmouth County divorce lawyer can assist you in understanding your alternatives.
Need Help Splitting Stock Options in Your New Jersey Divorce?
Stock options may get messy when they’re split. Our Monmouth County divorce lawyer at The Law Office of Jennifer J. McCaskill, LLC can help you safeguard your financial interests and secure a fair settlement.
Call 732-647-9256 today for a free case evaluation.