Definition in Detail
A vested interest refers to:
1. Legal Context
An interest in property that is certain to come about rather than being contingent on a future event that may or may not happen. For example, if a property is given “to A for life and then to B,” A’s interest is vested in possession, meaning A possesses the property now. B’s interest is also vested (but not in possession) because it is certain to come about upon A’s death.
A gift given to C conditional upon C reaching the age of 30 is not vested. If C does not reach 30, the interest never materializes. In this case, the interest is termed as a contingent interest.
2. Business Context
An involvement in the outcome of a business, scheme, transaction, etc., usually because it could lead to personal gain. For example, stakeholders, shareholders, or employees may have a vested interest in the success of a company or project.
Examples
-
Legal Vested Interest:
- Example 1: A will states, “I leave my house to my spouse, and upon their death, to my children.” Here, the spouse has a vested interest in possession, while the children have a vested interest that is not currently in possession but is certain to come about upon the spouse’s death.
- Example 2: A trust fund specifies, “If John reaches the age of 21, he shall inherit $100,000.” If John is currently 19, his interest is contingent on him reaching the age of 21.
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Business Vested Interest:
- Example 1: Employees receiving stock options that can be exercised after a certain period. These employees have a vested interest in the company’s performance as it affects the value of their stock options.
- Example 2: A vendor providing goods to a company might have a vested interest in the company’s success because increased sales could mean more orders for the vendor.
Frequently Asked Questions
What is the difference between vested interest and contingent interest?
- Vested Interest: Certain to come about, either presently possessed or guaranteed to be possessed in the future.
- Contingent Interest: Dependent on the occurrence of a specific event that may not necessarily happen.
Can a vested interest be transferred or sold?
Yes, a vested interest can typically be transferred or sold, depending on the terms of the interest and relevant legal stipulations.
How does a vested interest affect estate planning?
Vested interests provide clarity in estate planning as they ensure certain assets are determined for specific beneficiaries, aiding in straightforward distribution of assets upon events like death.
Is a vested interest always immediate?
No, a vested interest can be immediate (vested in possession) or future (not yet in possession). The certainty of eventual possession differentiates it from contingent interests.
What is meant by “vesting period” in business?
In business, a vesting period is the time an employee or stakeholder must wait before they gain full possession and potentially exercise their vested interest, often used in stock options or pension plans.
Related Terms
Vested in Possession
A vested interest where the individual has an immediate right to the property or benefit.
Contingent Interest
An interest in property that depends on the occurrence of an uncertain event.
Estate
The total property, assets, and liabilities left by an individual at death.
Beneficiary
A person designated to receive benefits from a will, trust, insurance policy, etc.
Trust
A fiduciary relationship in which one party, known as a trustee, holds legal title to property for the benefit of another party, known as a beneficiary.
Online References
- Investopedia: Vested Interest
- The Balance: What is a Vested Interest?
- IRS - Retirement Topics - Vesting
Suggested Books for Further Studies
- “Principles of Estate Planning” by Carolynn Tomin and Colleen Carcone
- “Estate Planning Basics” by Denis Clifford
- “The Law of Trusts and Trustees” by George T. Bogert
- “Wills, Trusts, and Estates, Ninth Edition” by Robert H. Sitkoff and Jesse Dukeminier
- “Business Ownership Transfer: Family, Estate, and Related Planning” by Lance Wallach
Accounting Basics: “Vested Interest” Fundamentals Quiz
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