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In
law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment, is described by its boundaries, ...
, vesting is the point in time when the rights and interests arising from legal
ownership Ownership is the state or fact of exclusive rights and control over property, which may be any asset, including an object, land or real estate, intellectual property, or until the Nineteenth Century, nineteenth century, slaves, human beings. Owner ...
of a property is acquired by some person. Vesting creates an immediately secured right of present or future deployment. 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 is the practice of passing on private property, Title (property), titles, debts, entitlements, Privilege (law), privileges, rights, and Law of obligations, obligations upon the death of an individual. The rules of inheritance differ ...

inheritance
law and
retirement plan A pension (, from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power of the R ...
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 An easement is a Nonpossessory interest in land, nonpossessory right to use and/or enter onto the real property of another without possessing it. It is "best typified in the right of way which one landowner, A, may enjoy over the land of another, ...
becomes vested. The original owner still retains the possession, but can no longer prevent the other party from crossing.


Inheritance

Some
bequestA bequest is property Property (''latin: Res Privata'') in the Abstract and concrete, abstract is what belongs to or with something, whether as an attribute or as a component of said thing. In the context of this article, it is one or more compone ...
s do not vest immediately upon death of the
testator A testator () is a person A person (plural people or persons) is a being that has certain capacities or attributes such as reason, morality, consciousness or self-consciousness, and being a part of a culturally established form of social relation ...
. For example, many
will Will may refer to: Common meanings * Will and testament A will or testament is a legal document that expresses a person's ( testator) wishes as to how their property (estate (law), estate) is to be distributed after their death and as to which ...
s specify that an
heir Inheritance is the practice of passing on private property, Title (property), titles, debts, entitlements, Privilege (law), privileges, rights, and Law of obligations, obligations upon the death of an individual. The rules of inheritance differ ...
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 In mathematics Mathematics (from Ancient Greek, Greek: ) includes the study of such topics as quantity (number theory), mathematical structure, structure (algebra), space (geometry), and calculus, change (mathematical analysis, analysis). It ...
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 In philosophy Philosophy (from , ) is the study of general and fundamental questions, such as those about reason, Metaphysics, existence, Epistemology, knowledge, Ethics, values, Philosophy of mind, mind, and Philosophy of language, langu ...
. This may happen with
entail In English common law, fee tail or entail is a form of trust established by deed or settlement which restricts the sale or inheritance Inheritance is the practice of passing on private property, titles A title is one or more words used be ...
ed
estate Estate or The Estate may refer to: Law * Estate (law), a term in common law for a person's property, entitlements and obligations * Estates of the realm, a broad social category in the histories of certain countries. ** The Estates, representative ...
s, or when property is left in trust to care for a child or relative without heirs. (See
trust law A trust is a legal relationship in which the legal title to property is entrusted to a person or legal entity with a fiduciary, fiduciary duty to hold and use it for another's benefit. In the common law, Anglo-American common law, the party who ...
for details).


Employment


Retirement plans

Vesting is an issue in conjunction with
employer Employment is the relationship between two party (law), parties, usually based on a employment contract, contract where work is paid for, where one party, which may be a corporation, for profit, not-for-profit organization, co-operative or oth ...
contributions to an
employee stock option Employee stock options (ESO) is a label that refers to compensation contracts between an employer and an employee that carries some characteristics of financial options. Employee stock options are commonly viewed as an internal agreement provid ...
plan, deferred compensation plan, or to a retirement plan such as a
401(k) In the United States, a 401(k) plan is an employer-sponsored defined-contribution pension account defined in subsection 401(k) of the Internal Revenue Code The Internal Revenue Code (IRC), formally the Internal Revenue Code of 1986, is the domesti ...
,
annuity An annuity is a series of payments made at equal intervals.Kellison, Stephen G. (1970). ''The Theory of Interest''. Homewood, Illinois: Richard D. Irwin, Inc. p. 45 Examples of annuities are regular deposits to a savings account, monthly home mort ...
or
pension A pension (, from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power of the R ...

pension
plan. Once 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"; for example. one has a right to a vested
pension A pension (, from Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power of the R ...

pension
. Generally, 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'' is an adverb or adjective meaning in equal portions or in proportion. The term is used in many legal and economic contexts. The hyphenated spelling ''pro-rata'' for the adjective form is common, as recommended for adjectives by some En ...
. Generally, for retirement plans in the
United States The United States of America (USA), commonly known as the United States (U.S. or US), or America, is a country Contiguous United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., federal di ...

United States
, employees are fully vested in their own salary deferral contributions upon inception. For employer contributions, however, the employer has limited options under the
Employee Retirement Income Security Act The Employee Retirement Income Security Act of 1974 (ERISA) (, codified in part at ) is a federal law, federal United States tax law, United States tax and United States labor law, labor law that establishes minimum standards for Retirement 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% 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 is a form of corporate equity Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other va ...
or positions in an
employee stock option Employee stock options (ESO) is a label that refers to compensation contracts between an employer and an employee that carries some characteristics of financial options. Employee stock options are commonly viewed as an internal agreement provid ...
plan to employees and other key participants such as
contractors A general contractor, main contractor or prime contractor is responsible for the day-to-day oversight of a construction site, management of vendors and trades, and the communication of information to all involved parties throughout the course of a ...
,
board members A board of directors is a group of people who jointly supervise the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit organization, or a government agency. The powers, dut ...
, advisors 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 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 (in other words, 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'' is an adverb or adjective meaning in equal portions or in proportion. The term is used in many legal and economic contexts. The hyphenated spelling ''pro-rata'' for the adjective form is common, as recommended for adjectives by some En ...
monthly vesting over the period with a six or twelve month cliff. Alternative vesting models are becoming more popular including milestone-based vesting and dynamic equity vesting. 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 plans

Profit-sharing plans are usually vested in ten years, although in some cases a plan may serve essentially 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.


Vested rights doctrine in zoning law

The vested rights doctrine is the rule of
zoning Zoning is a method of urban planning Urban planning, also known as regional planning, town planning, city planning, or rural planning, is a technical and political process that is focused on the development and design of land use and the bui ...
law by which an owner or 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 Planning permission or developmental approval refers to the approval needed for construction or expansion (including significant renovation), and sometimes for demolition, in some jurisdictions. It is usually given in the form of a building permi ...

building permit
or in reliance upon the probability of its issuance.


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 cases of partial vesting, a "vesting schedule" is a table or chart showing the portion of a right that is vested over time; typically the schedule provides for equal portions to vest on periodic vesting dates, usually once per day, month, quarter, or year, in stairstep fashion over the course of the vesting period. Often there is 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. "Graded vesting" (vesting after each year until the employee is fully vested) may be "uniform" (e.g., 20% of the compensation vested each year for five years) or "non-uniform" (e.g., 20%, 30%, and 50% of the compensation vested each year for the next three years).Graded Vesting
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See also

*
Doctrine of worthier title In the common law In law, common law (also known as judicial precedent or judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions. ''Black's Law Dictiona ...
*
Employee Retirement Income Security Act The Employee Retirement Income Security Act of 1974 (ERISA) (, codified in part at ) is a federal law, federal United States tax law, United States tax and United States labor law, labor law that establishes minimum standards for Retirement plans ...
(ERISA) *
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; th ...
*
Pro-rata ''Pro rata'' is an adverb or adjective meaning in equal portions or in proportion. The term is used in many legal and economic contexts. The hyphenated spelling ''pro-rata'' for the adjective form is common, as recommended for adjectives by some En ...
*
Remainder (law) In property law Property Property is a system of rights that gives people legal control of valuable things, and also refers to the valuable things themselves. Depending on the nature of the property, an owner of property may have the right t ...
*
Vested Property Act (Bangladesh) The Vested Property Act is a controversial law in Bangladesh Bangladesh (; bn, বাংলাদেশ, ), officially the People's Republic of Bangladesh, is a country in South Asia. It is the List of countries and dependencies by populatio ...


References

{{Reflist


External links


TIAA CREF discussion of vesting
Labour law Property law Inheritance Wills and trusts