What is vesting and why is vesting important? Vesting occurs when an interest becomes an enforceable legal right. Until vesting occurs, an interest is a mere expectancy. Let us examine vesting in the context of estate planning.
First, let us consider vesting in the context of a will. Anyone named as a beneficiary in another’s will has a mere expectancy in receiving a future inheritance. Only when the person dies does the beneficiary’s rights under the will vest. This can be changed, of course, by the beneficiary predeceasing the testator of the will, any creditor claims against the deceased testator’s estate, and perhaps even a will contest, as relevant. Until then, the named beneficiary has only a mere expectancy of a possible future inheritance. The will can always be re-written to reduce or eliminate the beneficiary’s inheritance; the assets in question can be sold or spent; the beneficiary might die; and creditor claims might reduce the estate. Any and all of which can occur without the involvement or consent of the potential Will Beneficiary.
Likewise with the so-called revocable Transfer on Death (“TOD”) Deed: The named Transferee has no vested rights in the real property until the Transferor dies.
Next, let us consider the case where someone gifts real property subject to a reserved life estate. In this case, the transferee (recipient) named in the deed has an immediately vested right in a future interest. Like the beneficiary named in the will, the transferee’s rights mature later when the transferor dies. But, unlike the will beneficiary, the transferee in the deed has a legal right that cannot be defeated by any changes in the wishes or fortunes of the transferor. Even if the transferee is not alive when the transferor dies, the transferee’s estate (or living trust) at the transferee’s death owns what is called a “vested remainder interest” in the subject property.
Now let us consider a beneficiary of a living trust. So long as the living trust is revocable, the rights of any trust beneficiary is subject to change through amendment or revocation of the trust. That said, unlike a will, a living trust commences while the settlor (person who established the trust) is still alive. While the settlor is alive, other people, such as the settlor’s family, may be allowed rights in the trust to benefit from trust distributions. These rights are vested and enforceable against the trustee (legal owner). But so long as the trust is amendable or revocable these rights can be reduced or eliminated at the pleasure of the settlor(s). Once the living trust becomes irrevocable, at the death or incapacity of the settlor(s), then the terms of the trust, including the rights of the beneficiary, are unalterable.
That does not, however, mean that the death beneficiaries of the trust are necessarily entitled to outright distributions. Some inheritances are held in further trust with the trustee given some or complete discretion over when, how much, and how to make distributions. For example, a beneficiary of a fully discretionary special needs trust has no right whatsoever to demand distributions. But such a beneficiary does have a vested interest in the trust to enforce other rights, such as requesting an accounting.
Persons named as death beneficiaries in a living trust are in the same situation as a will beneficiary. That is, their rights only vest once the settlor(s) dies. Until then, the settlor(s) can amend or revoke the living trust, can sell or spend the trust assets, and can lose the trust assets to creditors. Any and all of which events can reduce or eliminate the death beneficiary’s expectancy of a possible future inheritance.
As the saying goes, “don’t count your chickens before your eggs have hatched.” That sums up the situation when it comes to mere expectancy of a future inheritance as opposed to a vested right.
“Serving Lake and Mendocino Counties for nineteen years, the Law Office of Dennis Fordham focuses on legacy and estate planning, trust and probate administration, and special needs planning. We are here for you. 870 South Main Street Lakeport, California 95453-4801. Phone: 707-263-3235.”