Callahan Trust in New Jersey Divorce: Dividing Unvested Stock Options and RSUs

Divorce already comes with enough unfamiliar language. Then you are told that your spouse’s unvested shares will be placed in a “Callahan trust” until they vest, with little explanation of what that actually means or when you might receive your share. In New Jersey, a Callahan trust is a specific arrangement named after a 1976 divorce case. Despite the name, it is not a trust in the ordinary estate-planning sense.

A Callahan trust can be used when marital property cannot be divided immediately because its value or availability depends on something that will happen later, such as stock options, restricted shares, or other employment benefits that have not yet vested. The arrangement allows the court to preserve each spouse’s interest while postponing distribution until the asset becomes available. This article explains how a Callahan trust works in a New Jersey divorce, when courts may use one, what happens when the underlying asset vests, and what divorcing spouses should understand before agreeing to this type of deferred distribution.

Why Unvested Stock Options and RSUs Are Hard to Divide in a NJ Divorce

The problem with dividing unvested stock options or restricted stock units (RSUs) is that the divorce court does not control the employer’s equity plan. These plans generally restrict assignment or transfer to another person. In Callahan, for example, the company plan provided that the employee’s options could not be transferred during his lifetime and could be exercised only by him. An employer therefore is not ordinarily going to add an employee’s former spouse to its cap table or equity administration system simply because a divorce judgment awards that spouse a portion of the employee’s equity compensation.

That creates an unusual equitable distribution problem. A New Jersey court may determine that some or all of the unvested equity is marital property subject to distribution, yet still have no practical way to transfer the non-employee spouse’s share on the date of divorce. New Jersey courts have long dealt with stock options as assets that may require special treatment because ownership and exercise rights remain with the employee.

In practical terms, the court or the divorcing spouses generally have three ways to address the problem. They can determine a present value for the marital portion and have the employee spouse buy out the other spouse, typically taking estimated taxes into account. They can offset the non-employee spouse’s share against other marital property of equivalent value. Or they can defer the division until the stock options or RSUs actually vest and require the employee spouse to hold the other spouse’s portion in trust in the meantime. New Jersey divorce agreements have expressly used this type of constructive trust, commonly called a Callahan trust, to govern stock options that remain in the employee spouse’s name after divorce.

The difficulty with the first two approaches is that both require someone to assign a present value to an asset that may ultimately be worth far less than expected, or nothing at all. Our high-asset divorce coverage explains how stock options, RSUs, and similar executive compensation may be valued for equitable distribution purposes. [Editor’s note: point this link to the dedicated executive compensation article once it is published, per the pending content queue.]

Callahan v. Callahan: The New Jersey Case That Created This Trust

The arrangement takes its name from Callahan v. Callahan, 142 N.J. Super. 325 (Ch. Div. 1976), decided May 18, 1976, by Judge Griffin in the Superior Court of New Jersey, Chancery Division (Matrimonial). The husband was an executive who participated in his employer’s stock option plan. At the time of the divorce, he held several options that had been acquired during the marriage. He argued that the options were not property subject to equitable distribution because they represented only a future right to acquire stock and were subject to restrictions imposed by the company’s plan.

The court rejected that argument. Judge Griffin concluded that the stock options were a form of compensation earned during the marriage and constituted property subject to equitable distribution. The more difficult question was how to divide them. The employer’s plan prohibited ordinary transfers, the options could be exercised only by the husband during his lifetime, and exercising them required money to purchase the underlying shares.

Rather than require an immediate valuation or attempt a transfer that the company plan did not permit, the court imposed a constructive trust on the husband for the wife’s benefit. She received a 25% ownership interest in each remaining option, with the husband acting as trustee. She could direct him to exercise her portion, provided she supplied the necessary purchase funds. Once exercised, he was required to hold the corresponding shares in trust for her until they could be transferred or sold under the conditions established by the court.

That 25% figure is important. The court did not divide the options equally. Judge Griffin specifically explained that the percentage was lower than the wife’s share of other marital assets because the unexercised options might ultimately be worth nothing and because later increases in the stock’s value could result, at least partly, from the husband’s post-divorce efforts.

The court’s treatment of the constructive trust is also significant. Traditionally, fraud had been regarded as an essential basis for imposing a constructive trust. Judge Griffin acknowledged that history but concluded that a court exercising its equitable powers was not confined to cases involving fraud. Drawing on New Jersey precedent concerning unjust enrichment and equitable ownership, the court treated the constructive trust as a flexible remedy that could be used when allowing the legal owner to retain the entire beneficial interest would produce an inequitable result. That allowed the court to preserve the wife’s interest without forcing a transfer that might be impossible, inconvenient, or financially unwise.

New Jersey family law practitioners now commonly use the term “Callahan Trust” as shorthand for this type of constructive trust involving deferred or restricted compensation. Later New Jersey cases and divorce agreements use the term in that practical sense. Callahan itself, though, did not announce a separately named doctrine or create a formal species of trust called a “Callahan Trust.” It applied the existing equitable remedy of a constructive trust to solve the particular distribution problem presented by stock options.

How a Callahan Trust Differs From a Traditional Estate Planning Trust

Despite the name, a Callahan trust does not operate like the trusts most people associate with estate planning. There is no separate trust instrument to draft, no new legal entity to create, and no independent trustee appointed in the conventional sense. It does not receive its own tax identification number or require a separate set of trust accounts and annual trust accounting.

That is because a Callahan trust is a constructive trust. A constructive trust is an equitable remedy imposed by a court rather than a separate legal vehicle that the parties establish, fund, and administer. In Callahan, the court used that remedy because the stock options could not simply be transferred to the wife. Instead, it imposed the constructive trust on the husband and required him to hold her designated portion for her benefit.

Legal title to the stock options or RSUs therefore remains with the employee spouse. The employer continues to recognize that spouse as the holder of the award. For purposes of the divorce, though, equity treats the employee spouse as holding the former spouse’s allocated portion for that spouse’s benefit until the award can be exercised, settled, sold, or otherwise distributed according to the divorce agreement or court order.

An ordinary estate planning trust works differently. With that type of trust, a trust document establishes the arrangement, identifies a trustee and beneficiaries, and governs property actually transferred to or held in the trust. A Callahan trust does not perform those functions. Readers who want information about conventional trusts and their uses can visit the firm’s wills, trusts, and estate planning page.

This distinction has an important practical consequence. There is no independent trustee watching the account, administering the asset, or automatically making sure the former spouse receives what the divorce judgment requires. The arrangement depends heavily on the terms of the marital settlement agreement or court order and, when necessary, the court’s continuing ability to enforce those terms. That makes the details written into the agreement particularly important when a Callahan trust is used.

How a Callahan Trust Works in a New Jersey Divorce Settlement

A properly structured Callahan trust does more than state that one spouse is entitled to a percentage of future equity. It should establish exactly what happens when the options can be exercised or the RSUs vest. With stock options, the employee spouse generally exercises the non-employee spouse’s allocated portion at that spouse’s direction. The employee does not get to choose when the former spouse’s portion will be exercised simply because the options remain in the employee’s name. That basic structure comes directly from Callahan, where the wife could direct the husband to exercise the portion held for her benefit.

That arrangement raises a practical issue that can catch people by surprise: someone still has to pay the strike price. A stock option is not the stock itself. It is the right to purchase stock at a specified price. In Callahan, the wife was required to provide the money necessary to exercise her portion of the options. Modern settlement agreements can allocate that obligation differently, so requiring the non-employee spouse to advance the exercise price is not an immutable Callahan rule. It is a term that should be negotiated and stated clearly. If the agreement says who gets the economic benefit of an option but says nothing about who supplies the cash needed to exercise it, the parties have been handed an obvious future dispute.

RSUs create a different set of logistical and tax issues because there ordinarily is no strike price. Instead, the agreement should address what happens when the units vest, whether the resulting shares are transferred or sold, who bears taxes and withholding attributable to the award, and how the net proceeds are calculated. RSUs generally produce ordinary compensation income when they vest and are delivered, and employers commonly satisfy withholding obligations by withholding some of the shares that otherwise would have been delivered. As a result, an agreement promising a former spouse “half the shares” can produce a different result from one promising “half the value” or half of the net proceeds after taxes. Those terms should not be used interchangeably.

The agreement also has to accommodate securities-law and employer-imposed trading restrictions. That problem was already present in Callahan. The husband argued that federal securities rules applicable to corporate insiders, including restrictions involving insider trading and short-swing profits, complicated his ability to exercise or dispose of the options. The court recognized those restrictions rather than pretending that a divorce order could make them disappear.

Today, the same problem can arise through company trading windows, blackout periods, preclearance requirements, and Rule 10b5-1 trading plans. Public companies frequently restrict when certain employees and executives may trade company securities, while Rule 10b5-1 provides a framework for trades made under qualifying advance trading plans. A settlement agreement that gives the non-employee spouse an unconditional right to demand an immediate sale can therefore put the employee spouse in an impossible position if company policy or securities rules prohibit the transaction at that time. The agreement should account for those limitations while also preventing the employee spouse from using them as a pretext for unnecessary delay.

None of those protections works particularly well if the non-employee spouse is kept in the dark. Someone cannot make an informed decision about exercising an option or disposing of vested shares without knowing that a relevant event has occurred. A detailed agreement should therefore require written notice of vesting events and other developments that can affect the former spouse’s interest, including new grants that may fall within the agreement, material amendments to the equity plan, and the employee’s resignation, termination, retirement, or other departure from the company. Those notice provisions turn a theoretical right to future compensation into one the non-employee spouse can actually monitor and enforce.

Note: Neither approach is the default in New Jersey. Callahan v. Callahan, 142 N.J. Super. 325 (Ch. Div. 1976) established that a court may impose a constructive trust over unvested stock options rather than compel a present valuation or transfer; in that case, the non-employee spouse received 25% of each remaining option and had to supply the funds to exercise her share.

A buyout or offset tends to make more sense when the marital estate includes enough cash or other liquid assets to compensate the non-employee spouse without forcing a sale of property or creating financial strain. It can also appeal to spouses who want a clean break and would rather accept a negotiated present value than remain financially connected through future vesting events.

A deferred Callahan trust may be more practical when the unvested equity represents a large share of the marital estate, when its future value is genuinely speculative, or when neither spouse has the liquidity to fund an immediate buyout. In that situation, deferring distribution avoids forcing the parties to place a present-day number on compensation that may rise substantially, decline sharply, or never vest at all.

Neither approach is inherently better. A buyout provides certainty and finality, but it shifts future valuation and forfeiture risk to the employee spouse. A deferred arrangement preserves both parties’ exposure to the actual outcome, but it also keeps them financially connected and requires careful provisions governing notice, taxes, exercise decisions, and eventual distribution.

Callahan Trusts for Pensions, RSUs, and Other Deferred Compensation

Although Callahan involved stock options, the constructive trust approach is not necessarily limited to equity compensation. New Jersey courts can use deferred distribution when a marital asset cannot conveniently or legally be transferred at the time of divorce. Callahan itself compared stock options to pension interests, noting that both are forms of employment compensation whose enjoyment may be restricted or postponed.

The same practical problem can arise with pensions and other forms of deferred compensation when an immediate transfer would create tax consequences, violate plan restrictions, or trigger penalties. Non-qualified deferred compensation plans and supplemental executive retirement plans, commonly called SERPs, can present particular difficulties because they often cannot be divided through a Qualified Domestic Relations Order in the same manner as a qualified retirement plan. Our dividing retirement assets page discusses the treatment of retirement benefits more broadly.

Constructive trusts can also have a role in child support matters. When a supporting parent receives part of their compensation through stock options or similar deferred awards, a court may use a constructive trust to preserve the portion attributable to support rather than allow the timing of vesting or exercise to defeat the child’s interest. New Jersey family law practitioners have described Callahan-type arrangements in which options are allocated according to the applicable child support percentages. Our child support page provides more information about how support obligations are determined and enforced.

Risks and Limitations of Using a Callahan Trust in Your Divorce

A Callahan trust avoids forcing an immediate valuation, but it does not eliminate the underlying risks of unvested compensation. If the employee spouse leaves the company or is terminated before the applicable vesting date, some or all of the options or RSUs may be forfeited. If that happens, there may be nothing left for the constructive trust to hold or distribute. Unless the settlement agreement provides otherwise, both spouses bear that risk because both interests remain tied to whether the award ultimately vests.

The arrangement can also keep former spouses financially connected long after the divorce is final. Equity awards may vest over several years, and some compensation programs can extend the parties’ financial relationship for a decade or more. During that time, they may still need to exchange notices, respond to vesting events, coordinate exercises or sales, and resolve tax issues involving compensation earned years earlier.

Enforcement presents another difficulty. A Callahan trust does not come with an independent trustee who monitors compliance or steps in when something goes wrong. If the employee spouse fails to provide required information, ignores an exercise direction, improperly delays a transaction, or refuses to distribute proceeds, the other spouse may have to return to Family Court and file a motion to enforce litigant’s rights. That makes precise drafting particularly important because the court can enforce only the obligations the judgment or settlement agreement actually imposes.

The asset itself may also change after the divorce. Equity plans can be amended, companies can merge or be acquired, a change of control can accelerate or alter vesting, and outstanding awards may be converted, repriced, substituted, or otherwise modified. A settlement agreement that addresses only the award as it exists on the date of divorce may not adequately explain what happens if the employer later changes its form.

Additional compliance issues arise when the employee spouse is a Section 16 officer or another insider subject to heightened securities restrictions. Trading windows, reporting obligations, preclearance requirements, blackout periods, and other company policies can continue for as long as the employee remains subject to those rules. In those cases, the compliance burden is not theoretical. The divorce agreement must preserve the non-employee spouse’s economic rights without requiring the employee spouse to violate securities laws or employer-imposed trading restrictions.

Callahan Trust Checklist: What Your NJ Settlement Agreement Must Address

A Callahan trust only works as well as the language establishing it. Before signing a marital settlement agreement involving unvested stock options, RSUs, or other deferred compensation, the following issues should be addressed with your attorney:

• The marital percentage and how it was calculated. The agreement should identify what portion of each award is marital, what portion is separate, and the formula or methodology used to reach that allocation.
• Notice obligations and deadlines. It should specify what information the employee spouse must provide, including vesting notices, equity statements, plan changes, and other events affecting the award, as well as how quickly that information must be delivered.
• Who controls the exercise decision. For stock options, the agreement should state whether the non-employee spouse has the right to direct when their allocated portion is exercised and what procedures must be followed to communicate that direction.
• Who funds the strike price. Exercising an option requires money. The agreement should identify which spouse must provide the exercise funds, when the money must be provided, and what happens if those funds are not available when an exercise is requested.
• Tax allocation and withholding. The parties should address who bears income taxes and other tax consequences associated with vesting, exercise, or sale, how employer withholding will be handled, and whether distributions are calculated before or after those amounts are deducted.
• Sale timing and trading restrictions. The agreement should establish how and when vested shares may be sold while accounting for blackout periods, trading windows, preclearance requirements, and other securities or employer restrictions that may prevent an immediate transaction.
• Termination of employment, death, or disability. These events can accelerate vesting, cancel awards, shorten exercise periods, or otherwise change the parties’ rights. The agreement should state what happens to each spouse’s interest if one of them occurs.
• Accelerated vesting after a change of control. A merger, acquisition, or similar corporate transaction may cause awards to vest early or be converted into different compensation. The agreement should explain how the former spouse’s interest follows any replacement, accelerated, or converted award.
• A dispute resolution procedure. The parties should know what happens if they disagree about an exercise, sale, tax calculation, or interpretation of the agreement, including whether they must attempt negotiation, mediation, or another process before returning to court.
• Retention of jurisdiction. The judgment should preserve the Family Court’s ability to enforce the arrangement after the divorce, particularly because the equity may not vest or become distributable until years later.

A one-line provision stating that “the parties shall share the unvested shares equally” may sound sufficient when everyone is signing the divorce papers. It leaves nearly every important question unanswered. Those unanswered questions are exactly the kind of ambiguity that can turn deferred compensation into post-judgment litigation.

Callahan Trust FAQs

• Is a Callahan trust a real trust? No. It is a constructive trust — an equitable remedy the court imposes, not a separate legal entity with its own trust document or tax ID.
• Who holds the stock options in a Callahan trust? The employee spouse keeps legal title and holds the other spouse’s allocated share for their benefit until it can be exercised or distributed.
• What percentage does the non-employee spouse receive? There is no fixed percentage. In Callahan itself, the wife received 25% of each option, not 50%, because of forfeiture risk and post-divorce effort.
• Who pays to exercise the options? The settlement agreement should specify. In Callahan, the wife had to supply the exercise funds herself, but modern agreements can allocate this differently.
• What happens if the employee spouse leaves the company before vesting? The award may be forfeited, and both spouses generally bear that risk unless the agreement says otherwise.
• Does a Callahan trust apply to RSUs and pensions too? Yes. New Jersey courts can use the same constructive-trust approach for RSUs, pensions, and other deferred compensation that cannot be transferred immediately.

Speak With a New Jersey Divorce Attorney About Unvested Equity

Unvested stock options, RSUs, and other forms of deferred compensation can create difficult questions about valuation, timing, taxes, and enforcement during a divorce. Peter J. Bronzino and Bronzino Law Firm, LLC represent both employee spouses and non-employee spouses in matters involving executive compensation and other complex marital assets.

From its Manasquan office, the firm serves clients throughout Monmouth and Ocean County. If unvested equity is part of your divorce, an attorney can review the compensation plan, explain the available options for division, and help ensure that the settlement agreement addresses the practical issues that may arise after the judgment.

To discuss your situation with Peter J. Bronzino and the Bronzino Law Firm, LLC, call (732) 812-3102 to schedule a free, confidential consultation.

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