Stock Options and Callahan Trusts

While we frequently think of employment compensation as a paycheck, salary or perhaps a salary and bonuses or commission, increasingly New Jersey residents and businesses provide compensation in terms of a salary plus stock options or another type of deferred compensation. Stock options or other deferred compensation, as the name suggests, mean that the compensation is not available immediately, but rather will be available after a specified time period. The division of these assets at divorce can be difficult. Read on for information about how the assets may be treated in a divorce and call the Law Offices of Peter Van Aulen to discuss how these rules may apply to the specific facts and circumstances of your case.

In terms of a divorce, deferred compensation or stock options that are earned before the divorce is treated as a marital asset and is subject to equitable distribution at divorce.

If the deferred compensation has vested, meaning the specified amount of time has passed and the compensation is now available, the asset is handled relatively easily. Courts will typically determine the value of the compensation and require 1) that it be cashed out (or in the case of stock options, have the options exercised), or 2) the court can determine the value of the compensation and award it to the employee spouse and have equivalent assets awarded to the other spouse.

If the deferred compensation has not vested yet, this is where things get tricky; since it has not yet vested, there is no tangible asset to distribute yet. Since the couple is divorcing during the specified period of time that the compensation is deferred, the non-employee spouse may not be entitled to have the full amount of the compensation divided at divorce, but rather the portion of the compensation that was earned during the marriage.

In the case of unvested deferred compensation, since the asset cannot be transferred directly to the non-employee spouse, the employee may hold the asset in a constructive trust, called a Callahan Trust, for the other spouse. In the case of stock options, the employee spouse must exercise the option to purchase stock on behalf of the non-employee spouse. A Callahan Trust is so-called because of the 1976 New Jersey case that determined how stock options that have not yet vested are to be handled in a divorce.

Alternatively, as with vested compensation, the court may determine the value of the compensation and award it solely to the employee spouse and award equivalent assets to the non-employee spouse to offset that award. In the case of stock options this may not be a good option, given that the stock options may not have an equivalent alternative.

The equitable distribution of stock options and other deferred compensation must be carefully handled to ensure fairness. If you are considering a divorce, please call Peter Van Aulen a NJ divorce lawyer at 201-845-7400 for a consultation.

Callahan v. Callahan, 142 N.J. Super. 325 (1976)