Dividing financial assets in a divorce is normally about the math. Unvested equity compensation is another matter. Stock options or restricted stock units (RSUs) that vested during the marriage are easier to value and distribute. But determining whether and how unvested compensation fits into the picture is a bit more complicated.
How is Equity Compensation Structured?
To evaluate these assets fairly, we must first look at how they’re structured:
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Stock Options - A stock option gives you the right, but not the obligation, to buy a specific number of company shares at a fixed price within a set period. Most stock option plans are restricted, meaning the employee must stay with the company for a period before the options vest.
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Restricted Stock Unit (RSU) – The employer promises to give an employee shares of company stock (or a cash equivalent) in the future, once specific conditions—such as a time-based vesting schedule or performance goals—are met.
If the terms of the RSUs are satisfied during the marriage but before the legal separation or divorce filing, they become regular “stock.” Often they’re converted automatically into shares and become marital assets. Any unvested RSUs at the time of the separation will be treated like unvested stock options.
Both types of equity compensation are used as retention tools, and so they usually carry restrictions or time-based vesting schedules to incentivize long-term employment. If the conditions for vesting haven’t been met by the time a legal separation is executed or the divorce begins, a court will try to isolate the portion related to work performed during the marriage.
Is Unvested Equity Compensation Marital Property?
When a marriage dissolves, New York law draws a hard line between shared marital property and separate, post-divorce income. But how do you draw a line through an asset that hasn't fully materialized yet?
For regular deferred compensation plans, the court looks purely at the timeline. If the employee spouse worked at the company for 10 years and was married for 5 of those years, exactly 50% of the accumulated cash asset is considered marital property to be split. For Equity Deferrals (Options/RSUs), the math gets much more sophisticated. The court evaluates whether the equity was granted as a bonus for past work performed during the marriage, or as a forward-looking incentive to keep the employee at the company after the divorce. Only the portion deemed to be a reward for marital effort is divided.
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Awards for Past Performance
The courts start by looking at the purpose of the compensation offered. The New York Court of Appeals set out key factors in the landmark case DeJesus v. DeJesus (1997). The primary consideration is whether the options were offered to compensate for work already performed during the marriage, or given as an incentive for future work not yet performed. In DeJesus, the court easily concluded that compensation for work already performed would be handled akin to other deferred compensation plans. A simple formula factors out any work performed before the marriage, and options granted for work during the marriage and up until the legal separation or divorce filing would be marital assets subject to equitable distribution.
In New York, the term “marital property” means all property acquired by either or both spouses during the marriage and before either the execution of a separation agreement or the commencement of a matrimonial action, such as divorce or annulment. Once the court determines what percentage of any unvested options were earned during the marriage, it treats that portion as deferred compensation earned during the marriage. Even though the employee doesn’t own the underlying shares yet, the court assigns them an intrinsic value (current share price minus the strike price).
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Awards for Future Performance
For portions found to be granted as incentive for future work, a second time rule is applied to determine the marital share. This formula looks at the years passed from the grant date to the legal end of the marital property period and divides that by the total time from the grant date to the grant's maturity. It matches the period of employment that overlaps with the marriage, then factors out a period of future growth after the marriage that will be separate property for the employee spouse. Any years the employee worked prior to the marriage would be factored out.
How Can Unvested Options be Distributed?
It’s one matter to determine what percentage of unvested equity compensation is attributable to the marriage period; it’s quite another to assign a value to it and determine how to distribute that value between the couple. How do you fairly divide something that has massive potential today, but that might be worth absolutely nothing tomorrow?
If the company’s market stock price rises above the strike price, the option is valuable. If the market dips below it, the option is "underwater" and effectively worthless on paper, though it still holds future potential. Its future value depends heavily on market volatility, company survival, and strict employment conditions.
As with all marital property, New York State doesn’t require a strict 50-50 split. Instead, it requires an “equitable distribution” of the marital assets. This allows some flexibility in how to allot the value of unvested equity compensation.
It’s useful to compare how standard deferred compensation plans are typically distributed in a New York divorce. In those cases, the court can issue an Order requiring the company's plan administrator to split the account in half (or by the marital percentage) and create a separate account for the ex-spouse. Once the court approves that Order, the non-employee spouse controls their own share. If the employee spouse later quits, gets fired, or mismanages their career, it usually doesn't affect the portion already segregated for the ex-spouse.
Unvested equity compensation can’t be divided that cleanly, because federal securities laws and corporate plans explicitly block the transfer of unvested options or RSUs to third parties, so a court order can’t be used to split them. Instead, in New York, two primary distribution methods are used:
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Scenario A: The "Buy-Out" (Present-Value Approach)
In this arrangement, you estimate the present value of the unvested options deemed marital property. Then, one spouse (typically the employee) keeps 100% of the stock options, and the other spouse is given either a lump-sum cash payment or a larger share of other tangible assets (like the marital home or bank accounts) to offset that value.
In choosing a present-value buy-out, the employee spouse takes a risk. If the company collapses or the employee leaves before maturity and forfeits the options, the non-employee spouse still keeps the buy-out money. This is because under New York law, a property settlement or final distributive award is generally non-modifiable. The court views this as a final contract; post-divorce market shifts or career changes do not justify reopening the property division.
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Scenario B: The "Constructive Trust”
In this arrangement, both spouses share the risk or reward of the future value of the nonvested options. A mechanism called a “constructive trust” can be created for the non-employee spouse’s share. Also called a “forced trust,” it will name the employee spouse as the "trustee" for the ex-spouse's share.
The employee spouse must then legally hold the equity, wait for it to vest, exercise it under the agreement, and hand over the ex-spouse’s portion of the net cash proceeds. If the employee leaves the firm in good faith and the unvested equity vanishes, both parties walk away with nothing.
If the couple chooses the constructive trust option and the employee-spouse later leaves the company before maturity and/or otherwise forfeits some or all of the value, New York courts will closely examine whether there’s evidence of bad faith. If it can be shown that they purposely caused the value to drop solely to deprive their ex-spouse of their court-ordered share, they can be held in contempt of court. New York separation agreements typically include standard clauses that distinguish ordinary forfeiture from willful or bad-faith conduct. If bad faith is proven, a New York judge can order the employee spouse to pay the ex-spouse the value they intentionally destroyed.
If you or your spouse have unvested equity compensation, it’s important to understand how to determine the full marital share. Our attorneys at Bikel Rosenthal & Schanfield can help ensure those calculations are done properly and help you structure the distribution method that will work best for your financial future. Call us today at 212.682.6222 to discuss your situation, or connect online.