Vesting
Encyclopedia
In law
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...

, vesting is to give an immediately secured right of present or future enjoyment. One has a vested right to an asset that cannot be taken away by any third party, even though one may not yet possess the asset. When the right, interest or title to the present or future possession of a legal estate can be transferred to any other party, it is termed a vested interest. The concept can arise in any number of contexts, but the most common are inheritance
Inheritance
Inheritance is the practice of passing on property, titles, debts, rights and obligations upon the death of an individual. It has long played an important role in human societies...

 law and retirement plan law. In real estate to vest is to create an entitlement to a privilege or a right. For example, one may cross someone else’s property regularly and unrestrictedly for several years, and one’s right to an easement
Easement
An easement is a certain right to use the real property of another without possessing it.Easements are helpful for providing pathways across two or more pieces of property or allowing an individual to fish in a privately owned pond...

 becomes vested. The original owner still retains the possession, but can no longer prevent the other party from crossing.

Inheritance law

Some bequest
Bequest
A bequest is the act of giving property by will. Strictly, "bequest" is used of personal property, and "devise" of real property. In legal terminology, "bequeath" is a verb form meaning "to make a bequest."...

s do not vest immediately upon death of the testator
Testator
A testator is a person who has written and executed a last will and testament that is in effect at the time of his/her death. It is any "person who makes a will."-Related terms:...

. For example, many will
Will (law)
A will or testament is a legal declaration by which a person, the testator, names one or more persons to manage his/her estate and provides for the transfer of his/her property at death...

s specify that an heir who dies within a set period (such as 60 days) is not to inherit, and further specify how the corresponding share is to be distributed. This is generally done to obviate disputes over the precise time of death, and to avoid paying taxes twice in rapid succession should multiple members of a family die in the wake of a disaster. Such a bequest does not vest until the expiration of the specified period, because the actual heir cannot be determined with certainty.

It is also possible to give a person, A, a life interest in a property, with the remainder
Remainder (law)
A remainder in property law is a future interest given to a person that is capable of becoming possessory upon the natural end of a prior estate created by the same instrument...

 to go to another person or persons, B. If the beneficiary of the remainder cannot yet be known, then the remainder is said not to have vested, and the remainder is said to be contingent. This may happen with entail
Fee tail
At common law, fee tail or entail is an estate of inheritance in real property which cannot be sold, devised by will, or otherwise alienated by the owner, but which passes by operation of law to the owner's heirs upon his death...

ed estate
Estate (law)
An estate is the net worth of a person at any point in time. It is the sum of a person's assets - legal rights, interests and entitlements to property of any kind - less all liabilities at that time. The issue is of special legal significance on a question of bankruptcy and death of the person...

s, or when property is left in trust to care for a child or relative without heirs. (See trust law
Trust law
In common law legal systems, a trust is a relationship whereby property is held by one party for the benefit of another...

 for details.)

Retirement plans

Vesting is an issue in conjunction with employer contributions to an employee stock option
Employee stock option
An employee stock option is a call option on the common stock of a company, issued as a form of non-cash compensation. Restrictions on the option attempt to align the holder's interest with those of the business shareholders. If the company's stock rises, holders of options generally experience a...

 plan, or to a retirement plan such as a 401(k)
401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...

, annuity or pension
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...

 plan.

A vested right is "an absolute right; when a retirement plan is fully vested, the employee has an absolute right to the entire amount of money in the account." It is a "basic right that has been granted, or has accrued, and cannot be taken away. Example: one's right to a vested pension."

The portion vested cannot be reclaimed by the employer, nor can it be used to satisfy the employer's debts. Any portion not vested may be forfeited under certain conditions, such as termination of employment. The portion invested is often determined pro-rata
Pro-rata
Pro rata is an adverb or adjective, meaning in proportion. The term is used in many legal and economic contexts. It is sometimes spelled pro-rata, but this is technically a misspelling of the Latin phrase...

.

For retirement plans in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

, employees are fully vested in their own salary deferral contributions upon inception. For employer contributions, the employer has limited options under the Employee Retirement Income Security Act
Employee Retirement Income Security Act
The Employee Retirement Income Security Act of 1974 is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans...

 (ERISA) to delay the vesting of their contributions to the employee. For example, the employer can say that the employee must work with the company for three years or they lose any employer contributed money, which is known as cliff vesting. Or it can choose to have the 20 percent of the contributions vest each year over five years, known as graduated vesting.

Choosing a vesting plan allows an employer to selectively reward employees who remain employed for a period of time. In theory, this allows the employer to make greater contributions than would otherwise be prudent, because the money they contribute on behalf of employees goes to the ones they most want to reward.

Ownership in startup companies

Small entrepreneurial companies usually offer grants of common stock
Common stock
Common stock is a form of corporate equity ownership, a type of security. It is called "common" to distinguish it from preferred stock. In the event of bankruptcy, common stock investors receive their funds after preferred stock holders, bondholders, creditors, etc...

 or positions in an employee stock option
Employee stock option
An employee stock option is a call option on the common stock of a company, issued as a form of non-cash compensation. Restrictions on the option attempt to align the holder's interest with those of the business shareholders. If the company's stock rises, holders of options generally experience a...

 plan to employees and other key participants such as contractors
Independent contractor
An independent contractor is a natural person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a verbal agreement. Unlike an employee, an independent contractor does not work regularly for an employer but works as and when...

, board members
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...

, advisors
Advisory board
An advisory board is a body that advises the board of directors and management of a corporation but does not have authority to vote on corporate matters, nor a legal fiduciary responsibility...

 and major vendors. To make the reward commensurate with the extent of contribution, encourage loyalty, and avoid spreading ownership widely among former participants, these grants are usually subject to vesting arrangements.

Vesting of options is straightforward. The grantee receives an option to purchase a block of common stock, typically on commencement of employment, which vests over time. The option may be exercised at any time but only with respect to the vested portion. The entire option is lost if not exercised within a short period after the end of the employer relationship. The vesting operates simply by changing the status of the option over time from fully unexercisable to fully exercisable according to the vesting schedule.

Common stock grants are similar in function but the mechanism is different. An employee, typically a company founder, purchases stock in the company at nominal price shortly after the company is formed. The company retains a repurchase
Repurchase agreement
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale of securities together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively...

 right to buy the stock back at the same price should the employee leave. The repurchase right diminishes over time so that the company eventually has no right to repurchase the stock, i.e. the stock becomes fully vested.

Beginning in the 1990s vesting periods in the United States are usually 3–5 years for employees, but shorter for Board members and others whose expected tenure at a company is shorter. The vesting schedule is most often a pro-rata
Pro-rata
Pro rata is an adverb or adjective, meaning in proportion. The term is used in many legal and economic contexts. It is sometimes spelled pro-rata, but this is technically a misspelling of the Latin phrase...

 monthly vesting over the period with a six or twelve month cliff.

In the case of both stock and options, large initial grants that vest over time are more common than periodic smaller grants because they are easier to account for and administer, they establish the arrangement up-front and are thus more predictable, and (subject to some complexities and limitations) the value of the grants and holding period requirements for tax purposes are set upon the initial grant date, giving a considerable tax advantage to the employee.

Profit-sharing

Profit-sharing plans are usually vested in 10 years, although in some cases a plan may essentially serve as a pension by allowing a limited amount of vesting should the employee retire or leave on good terms after an extended period of employment.

Vesting arrangements and terminology

A vesting period is a period of time an investor or other person holding a right to something must wait until they are capable of fully exercising their rights and until those rights may not be taken away.

In many cases vesting does not occur all at once. Specific portions of the rights grant vest on different dates over the duration of the period of the vesting. When part of a right is vested and part remains unvested, it is considered partly vested.

In the case of partial vesting, a vesting schedule is a table or chart showing the portion of a right that is vested over time. Most typically the schedule provides for equal portions to vest on periodic vesting dates, usually once per day, month, quarter, or year, in stair-step fashion over the course of the vesting period. There is often a cliff by which the first few steps in the graph are missing, so that there is no vesting at all for a period (usually six or twelve months in the case of employee equity), after which there is a cliff date upon which a large amount of vesting occurs all at once. Some arrangements provide for accelerated vesting, by which all or a major portion of the unvested right vests all at once upon the occurrence of a specified event such as a termination of employment by the company or acquisition of the company by another. Less commonly, the vesting schedule may call for variable grants or subject to conditions such as reaching milestones or employee performance.

Vested rights doctrine in zoning law

The vested rights doctrine is the rule of zoning
Zoning
Zoning is a device of land use planning used by local governments in most developed countries. The word is derived from the practice of designating permitted uses of land based on mapped zones which separate one set of land uses from another...

 law by which an owner/developer is entitled to proceed in accordance with the prior zoning provision where there has been a substantial change of position, expenditures or incurrence of obligations made in good faith by an innocent party under a building permit or in reliance upon the probability of its issuance.

See also

  • Doctrine of worthier title
    Doctrine of worthier title
    In the common law of England, the doctrine of worthier title was a legal doctrine that preferred taking title to real estate by descent over taking title by devise or by purchase...

  • Employee Retirement Income Security Act
    Employee Retirement Income Security Act
    The Employee Retirement Income Security Act of 1974 is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans...

  • Future interest
    Future interest
    In property law and real estate, a future interest is a legal right to property ownership that does not include the right to present possession or enjoyment of the property. Future interests are created on the formation of a defeasible estate; that is, an estate with a condition or event...

  • Pro-rata
    Pro-rata
    Pro rata is an adverb or adjective, meaning in proportion. The term is used in many legal and economic contexts. It is sometimes spelled pro-rata, but this is technically a misspelling of the Latin phrase...

  • Remainder (law)
    Remainder (law)
    A remainder in property law is a future interest given to a person that is capable of becoming possessory upon the natural end of a prior estate created by the same instrument...

  • Vested Property Act (Bangladesh)
    Vested Property Act (Bangladesh)
    The Vested Property Act is a controversial law in Bangladesh that allows the Government to confiscate property from individuals it deems as an enemy of the state. Before the independence of Bangladesh in 1971, it was known as the Enemy Property Act and is still referred to as such in common parlance...


External links

The source of this article is wikipedia, the free encyclopedia.  The text of this article is licensed under the GFDL.
 
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