What is vesting and non-vesting? Understanding the Differences Between Vesting and Non-Vesting Terms in a Will

In the world of estate planning, the terms vesting and non-vesting are frequently used to describe the ownership and transfer of property after the death of an individual. Understanding these terms is crucial for those creating wills or navigating the estate administration process. This article will provide an overview of vesting and non-vesting, their differences, and why it is important to understand them when creating or updating your will.

Vesting

Vesting refers to the transfer of property or rights to a beneficiary or beneficiaries after the death of the decedent. Vesting occurs when a beneficiary's rights in property or assets become absolute and irrevocable. In other words, once property is vested, the beneficiary can enforce their rights in the property, regardless of the wishes of the decedent or any other beneficiary.

There are two types of vesting:

1. Absolute Vesting: In this case, the property or asset automatically transfers to the beneficiary upon the decedent's death. This usually occurs upon the satisfaction of certain conditions, such as the beneficiary's age or date of birth.

2. Conditional Vesting: In this case, the property or asset transfers to the beneficiary only if the beneficiary meets certain conditions or fulfills certain requirements. If the beneficiary does not meet these conditions, the property or asset reverts to the decedent's estate or other beneficiaries.

Non-Vesting

Non-vesting refers to the opposite of vesting, where property or assets do not transfer automatically to the beneficiary upon the decedent's death. Instead, the property or assets remain part of the decedent's estate and are distributed according to the instructions in the will or, if no will is in place, according to the laws of the state where the decedent lived.

Non-vesting can take several forms:

1. Transfer on Death (TOD) or Transferable Ownership (TO) Accounts: These are accounts or instruments that allow property to transfer to designated beneficiaries upon the decedent's death, but only if certain conditions are met. For example, a TOD account can transfer to the beneficiary only if the account holder is over a certain age.

2. Life insurance policies: Life insurance policies can be designated as beneficiary accounts, with the proceeds being paid to the designated beneficiary upon the death of the policyholder. However, the policyholder still owns the policy until their death, and the proceeds are considered part of their estate for tax purposes.

Understanding the Differences

Vesting and non-vesting are important considerations when creating or updating your will, as they can have significant implications for your beneficiaries and estate. Here are some key differences to keep in mind:

1. Transfer of property: With vesting, property or assets automatically transfer to the beneficiary upon the decedent's death, while with non-vesting, the property or assets remain part of the decedent's estate.

2. Enforceability: With vesting, the beneficiary's rights in property or assets are enforceable, while with non-vesting, the beneficiary's rights are not always guaranteed.

3. Tax implications: The transfer of property and enforceability can have significant tax implications, depending on the specific vesting or non-vesting provisions in your will.

4. Legal implications: Vesting and non-vesting can also impact the legal proceedings surrounding the decedent's estate, such as probate and inheritance taxes.

Understanding vesting and non-vesting is crucial for those creating or updating their wills. By clearly defining the transfer of property and rights to beneficiaries, you can ensure that your estate plan is aligned with your wishes and the best interests of your beneficiaries. If you have any questions or need assistance in creating or updating your will, please seek the advice of an attorney.