Unvested RSUs and Stock Options in a New Jersey Divorce: Who Gets Equity That Has Not Vested

Part of our October series on executive compensation in a New Jersey divorce. Start with the overview: Stock Options, RSUs, and Bonuses in a New Jersey Divorce. 

The grant agreement is the most important document in many high-income divorces, and it is the one almost nobody reads closely until the case is underway.

Unvested equity is a promise. Part of it pays for work already done. Part of it pays for work not yet done, and some of it pays nothing unless the employee is still on the payroll on a date that falls after the divorce is over. New Jersey law asks which part is which. The answer can move hundreds of thousands of dollars, and it is usually sitting in documents the employee can download in five minutes.

Year-end is when equity holders start doing this math, with year-end vesting dates and the next grant cycle close at hand. The filing date matters. The documents matter more.

This post goes deeper than our overview. It covers how New Jersey decides whether unvested awards are marital, how the marital share is measured one vesting tranche at a time, why an underwater option is not worthless, who controls the exercise decision after the divorce, and what a settlement agreement has to say so the division actually happens.

In this guide

• Are unvested RSUs marital property in New Jersey?
• Why the reason for the grant matters
• How the marital share is measured
• Equity granted before the marriage or after the complaint
• Valuing unvested stock options
• Who controls the exercise decision
• When the employee leaves or the company is sold
• What the settlement should say

Are Unvested RSUs Marital Property in New Jersey?

Start with the presumption. An unvested award received during the marriage is presumed distributable, even when it vests after the complaint is filed, unless and to the extent the spouse who received it proves the award was for post-complaint performance. M.G. v. S.M., 457 N.J. Super. 286 (App. Div. 2018). An award granted after the complaint can still be divisible when it compensates efforts made during the marriage. Pascale v. Pascale, 140 N.J. 583 (1995).

Two things follow. The employee carries the burden. And the burden can be met in part, so the real fight is rarely all or nothing. It is over how much of each award belongs to the marriage.

The filing date of the complaint marks the line. Painter v. Painter, 65 N.J. 196 (1974). Everything below is about measuring which side of that line the work behind each award falls on.

Why the Reason for the Grant Decides How Much Is Marital

The vesting schedule tells you when an award pays. It does not tell you what the award paid for. Courts look at what the award was meant to compensate, and the best evidence is what the employer wrote at the time.

Language that points to work already done

• Awards described as recognizing performance for a completed year or review cycle
• Annual long-term incentive awards sized by the prior year’s results
• Promotion awards tied to a promotion earned during the marriage

Language that points to work after the complaint

• Retention awards made to keep the employee from leaving, with vesting conditioned on staying through future dates
• Awards whose number of shares depends on company results measured after the complaint

Language that cuts both ways

• Sign-on awards that replace equity forfeited at a prior employer. They make the employee whole for work done at the old job, but they are paid to secure service at the new one.
• Annual refresh grants. Many companies make a new grant each year to keep an employee’s unvested equity at a target level. A refresh grant made shortly before the complaint is presumed marital, but its stated purpose is usually retention, and that is where the employee’s rebuttal tends to start.

The employee’s after-the-fact explanation carries little weight on its own. Testimony that a grant was about keeping the employee does not outweigh an award notice saying it recognized last year’s results. When the award documents are silent, the employer’s compensation committee materials and equity plan policies, and the timing of the award against the review cycle, fill the gap. Those records sit with the employer and can be subpoenaed. R. 1:9-2 (“A subpoena . . . may require production of books, papers, documents, electronically stored information, or other objects designated therein”).

Case example: We represented a husband who, as part of his compensation package from his employer, received RSUs that vested over three years. His wife sought a share of the RSUs that had vested before the complaint, She knew about the unvested RSUs, and the law presumed them marital, but she did not seek a share of them or request the grant documents or employer records behind them. The parties settled on terms that divided the vested RSUs and left the unvested awards with our client.

Actual results may vary. Prior case results do not guarantee similar outcomes.

How Courts Measure the Marital Share of Unvested Stock Options and RSUs

Once part of an award is shown to reward post-complaint work, the split has to be measured. To do this, New Jersey uses a time-rule formula, also known as a coverture fraction, that measures the portion of the earning period that fell during the marriage, generally after the date of the marriage and before the filing date of the complaint.

The coverture fraction calculates what percentage of an asset was earned during the marriage. To calculate the marital portion of an asset earned over time, you take the time the employee-spouse worked toward the asset during the marriage and divide it by the total time the employee-spouse worked toward it.

Note that an employee-spouse can contribute toward an asset before the date of the marriage but receive compensation for that effort after the wedding date. Although that compensation is received during the marriage, it came from premarital efforts, making the contribution nonmarital. Similarly, an employee-spouse can contribute toward an asset before the filing date of the complaint but receive compensation for that effort afterward. That post-complaint compensation came from efforts expended during the marriage, making the contribution marital. See M.G. v. S.M., 457 N.J. Super. 286 (App. Div. 2018) (adopting the time-rule formula to calculate the marital portion of unvested equity acquired during the marriage that vests after the complaint is filed); see also Moore v. Moore, 114 N.J. 147 (1989) (applying the coverture time-rule methodology to a pension, including premarital, marital, and post-complaint efforts); Marx v. Marx, 265 N.J. Super. 418 (Ch. Div. 1993) (standard coverture fraction calculation).

Under New Jersey’s presumption, we treat the time rule as a tool for rebuttal rather than a starting point. The award begins as marital. A time-rule calculation is how the employee proves which part of it rewards work after the complaint, and how the other spouse tests whether that proof holds up.

The calculation has to run tranche by tranche. A four-year grant does not have one vesting date. It has four, and each has its own fraction.

Take a grant of 4,000 RSUs made in January 2025, vesting 1,000 units each January from 2026 through 2029, with the complaint filed in July 2026. The first tranche vested before the complaint. Measuring the rest from the grant date:

Changing the method impacts the calculation. If the measurement starts from a hire date three years before the grant, the marital percentage of the unvested units rises. If a single fraction is applied to the whole grant measured to the final vesting date, then the marital share of the unvested units in the early tranches is undercounted by as much as half. In this example, that shortcut drops the marital share of the unvested units from 1,625 to 1,125. Five hundred units is real money, which is why the method gets argued, and why a settlement should choose it on purpose.

The allocation is also a support question

The part of an award divided as an asset should not be counted again as income for alimony when it vests. Innes v. Innes, 117 N.J. 496 (1990); Flach v. Flach, 256 N.J. Super. 333 (App. Div. 1992). Units allocated to post-complaint work are a different matter. They remain the employee’s, and when they vest they can be income for spousal support. So the same allocation decides two numbers at once: the equitable distribution award and the income available for alimony.

Equity Granted Before the Marriage or After the Complaint

Awards granted before the wedding that vest during the marriage are not automatically marital. The portion earned before the marriage is separate. Growth in value during the marriage can still be divisible when it traces to the couple’s efforts. Valentino v. Valentino, 309 N.J. Super. 334 (App. Div. 1998) (increases in value during the marriage to immune assets due to the active efforts, management, or joint contributions of the couple, including a dependent spouse’s non-economic efforts, are divisible). For equity, the question is usually whether the employee’s work drove the company’s value. That argument is easier to make for a founder or senior executive than for an employee whose shares rose with the market.

Awards granted after the complaint are generally separate, but not automatically. A grant made in February for the prior year’s performance can be divisible if part of that year fell before the complaint. Pascale v. Pascale, 140 N.J. 583 (1995). Look closely at the first grant after the complaint. Its timing and stated purpose decide whether any of it is divisible.

Filing Before or After December 31: Year-End Divorce Timing in New Jersey

Valuing Unvested Stock Options: Why an Underwater Option Is Not Worthless

RSUs are comparatively simple to value: units times share price, adjusted for the chance the award never vests and for the tax due when it does. 26 U.S.C. § 83. Options are harder.

An option has two kinds of value. Intrinsic value is the spread between today’s share price and the exercise price. Time value is what the right to wait is worth, because the stock can rise before the option expires. An option whose exercise price is above the current share price is underwater. Its intrinsic value is zero. Its time value may not be, especially with years left before expiration and a volatile stock.

This matters most in an offset. A spouse who agrees to value underwater options at zero and trade them away may be giving up real value. A spouse who accepts a pricing-model value without a discount for forfeiture may be paying for value that never arrives. Have someone who values employee options for a living run the numbers before anyone signs.

Deferred distribution avoids the problem. Underwater options divided as they vest need no value at all. The other spouse’s share simply rides along and pays off only if the stock recovers. That is one of the better arguments for deferring options rather than offsetting them. See generally Callahan v. Callahan, 142 N.J. Super. 325 (Ch. Div. 1976) (“where actual transfer of the options (or exercise and transfer of the stock) may be neither possible, profitable, nor convenient,” a constructive trust may be created obligating the employee-spouse to hold the other spouse’s share of stock options until the other spouse wants to exercise them).

Divorcing a Business Owner in New Jersey (working with valuation experts)

Who Controls the Exercise Decision After a New Jersey Divorce

Deferred distribution solves the valuation problem, but it creates a control problem. Options usually cannot be transferred, and incentive stock options lose their tax treatment if they are, 26 U.S.C. § 422(b)(5), so they stay in the employee’s account. The employee decides when to exercise. The other spouse owns a share of something they cannot touch.

That gap can drive post-judgment litigation over equity. The employee exercises when it suits their own tax position, lets options lapse, or sells on a schedule the other spouse never agreed to, and the other spouse finds out from a tax form months later.

A settlement agreement should answer the control question directly: whether the other spouse can direct exercise of their share and when, what happens if they do not respond, how the exercise price and withholding are funded, how proceeds are delivered and within how many days, and what happens to options approaching expiration. See Callahan v. Callahan, 142 N.J. Super. 325 (Ch. Div. 1976) (permitting the creation of constructive trusts for assets held by one spouse that were equitably distributed to the other); cf. N.J.S.A. 2A:34-23 (trusts may be created to secure spousal support and child support).

Tax has to be allocated in the same place. For non-qualified options transferred incident to divorce, the receiving spouse recognizes the income on exercise. Rev. Rul. 2002-22, 2002-1 C.B. 849. When options cannot be transferred and the employee exercises them for the other spouse, the employer generally reports the income to the employee, so the agreement should shift that cost. Exercising incentive stock options can create alternative minimum tax exposure for the employee. 26 U.S.C. § 56(b)(3). The agreement should say which spouse bears which tax and how after-tax proceeds are computed.

When the employee does not comply, the usual remedy is an application to enforce litigant’s rights. R. 1:10-3. Noncompliance and even misappropriation can also expose the employee to a breach of fiduciary duty claim. See Kaye v. Rosefielde, 223 N.J. 218 (2015) (disloyal conduct by a fiduciary constitutes a breach of fiduciary duty); F.G. v. MacDonell, 150 N.J. 550 (1997) (breach of fiduciary duty can exist in relationships of trust and confidence outside of traditional business settings).

Case example: We represented a spouse in a contested divorce matter who was entitled to a share of her husband’s stock options. The husband knew our client was entitled to a share of the options, but his company did not allow him to transfer those options to her. Given the stock price, our client did not want the husband to be made to exercise her share and transfer the proceeds to her. Ultimately, on the eve of trial, the parties resolved the dispute by agreeing that the husband would hold our client’s share of the options in trust, and that our client would bear the tax consequences to him whenever she chose to have her share exercised and the stock transferred to her.

Actual results may vary. Prior case results do not guarantee similar outcomes.

Post-Judgment Divorce Motions in New Jersey

What Happens to Unvested Equity If the Employee Leaves, Is Fired, or the Company Is Sold

Unvested equity carries risks neither spouse controls. The agreement has to allocate them.

• Resignation. Most plans forfeit unvested awards when the employee resigns. Under deferred distribution, the other spouse’s share disappears along with the employee’s. Under an offset, the employee already paid for value that is now gone.
• Termination without cause. Some plans accelerate part of the vesting or allow continued vesting. Others forfeit everything.
• Sale of the company. Many plans accelerate vesting on a change in control, sometimes only if the employee is also terminated, which is called double-trigger acceleration. Unvested units may convert into the buyer’s equity or into cash on new terms.
• Death or disability. Plans often accelerate. The agreement should say what each spouse, or each estate, receives.
• Splits, spinoffs, and mergers. The share count changes. Divide a percentage of each award, with adjustments carried through, rather than a fixed number of units.

A spouse receiving a share through deferred distribution is exposed to the employee’s career decisions. Agreements can address that with a floor, buyout right, or payment triggered by a departure designed to defeat the other spouse’s share. Whether that protection is worth negotiating depends on how large the unvested equity is relative to everything else.

What a New Jersey Divorce Settlement Should Say About Unvested Equity

1. Identify each award by grant date, grant number, type, and number of units or options.
2. State the marital share of each tranche and the method used to calculate it.
3. Choose present-value offset or deferred distribution, award by award.
4. For deferred awards, provide that the employee holds the other spouse’s share in trust for them.
5. Require notice of every vesting, exercise, expiration, and sale, with copies of the statements.
6. For options, give the other spouse a right to direct exercise of their share, with a response deadline and a default if they do not respond.
7. Allocate the exercise price, withholding, and income tax, and say how after-tax proceeds are computed.
8. Set a deadline for delivering proceeds or shares.
9. Address resignation, termination, a sale of the company, death, and disability.
10. Divide by percentage of each award so splits and conversions carry through.
11. Give the other spouse continuing access to plan statements after the judgment.
12. Say how disputes are resolved and who pays when one side has to enforce.

Not every agreement needs every term. A modest award may be simpler to buy out. But each term left out is a decision deferred, usually to a motion.

Year-End Bonuses and Deferred Compensation in a New Jersey Divorce

Divorce and Retirement Assets in New Jersey (deferred distribution)

High-Income Alimony Risks in New Jersey

Frequently Asked Questions: Unvested RSUs and Stock Options in a New Jersey Divorce

Do RSUs that vest after the divorce complaint still get divided in New Jersey?

Usually, at least in part. Awards received during the marriage are presumed divisible even if they vest after the complaint is filed. The employee can keep the portion that rewards work after the complaint, but only by proving it, and the grant documents are usually the evidence. Awards granted after filing can also be divisible if they compensate work done during the marriage.

How do courts calculate the marital share of unvested stock options?

Usually with a time rule: the fraction of the earning period that fell during the marriage and before the complaint, calculated separately for each vesting tranche. The start date matters, because measuring from the hire date rather than the grant date raises the marital share. Applying one fraction to the whole grant can understate the marital share of the early tranches by as much as half.

Can a retention grant be kept out of equitable distribution in New Jersey?

Sometimes, in whole or in part. Unvested awards received during the marriage are presumed marital, so the employee must prove the award was for post-complaint performance. Grant language describing retention, vesting conditioned on staying employed, and timing apart from the review cycle all help. The employee’s after-the-fact explanation, without documents, rarely does.

What happens to my spouse’s share if I leave my job before my RSUs vest?

Under most plans, unvested awards are forfeited on resignation. If the award is being divided as it vests, your spouse’s share is forfeited along with yours unless the settlement says otherwise. If you already offset your spouse’s share with other assets, you bear the loss alone. Agreements can allocate this risk, and should when the unvested equity is significant.

Are underwater stock options worth anything in a divorce?

Often, yes. An underwater option has no intrinsic value today, but it can have real time value when years remain before expiration and the stock is volatile. Valuing it at zero in an offset can give away real value. Dividing it through deferred distribution avoids the valuation question, because the other spouse’s share pays off only if the stock recovers.

Who decides when divided stock options are exercised after a New Jersey divorce?

The employee, unless the settlement says otherwise, because options usually cannot be transferred and stay in the employee’s account. A well-drafted agreement gives the other spouse the right to direct exercise of their share, sets response deadlines, allocates the exercise price and taxes, and requires prompt delivery of proceeds. Without those terms, the remedy is an enforcement motion.

What should a New Jersey divorce settlement say about unvested equity?

It should identify each award, state the marital share of each tranche and the method used, choose offset or deferred distribution, require notice of vesting and exercise, allocate taxes and the exercise price, set delivery deadlines, and address resignation, termination, a sale of the company, and stock splits. Each term left out is a likely future motion.

Contact The Law Office of Rajeh A. Saadeh, L.L.C.

Unvested equity is decided by documents most people never read and by terms most agreements never include. The presumption favors one spouse, the burden falls on the other, and the drafting decides whether either of them receives what the court intended.

The Law Office of Rajeh A. Saadeh, L.L.C., represents executives, senior professionals, and their spouses in divorces involving RSUs, stock options, performance shares, and other equity compensation throughout New Jersey, at trial and on appeal. We serve clients statewide, including Somerset County, Middlesex County, Morris County, Hunterdon County, and Monmouth County.