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Cliff granting is the practice of granting full ownership of an asset at one time, commonly found in retirement and incentive programs and inheritance law. It provides an incentive for employees to stay with their employer and can protect an estate and its heirs.
Cliff granting, the practice of granting a person a full ownership interest in an asset at one time, carries benefits for both the grantor and the recipient of the assets. The concept is most commonly found in employee retirement and incentive programs, as well as inheritance law. However, in all cases, it provides for the passage of time between the grant of an asset and the recipient’s full interest in that asset.
Most Americans are familiar with the concept of vesting as an element of their employer-sponsored retirement savings plans. Employee ownership interest, or vesting, in their own plan contributions is complete and immediate. However, if the employer contributes to the plan, the employee generally does not have full and immediate ownership rights to those contributions. Instead, he must wait a certain period of time before the acquisition is made.
Some plans are awarded gradually so that the employee’s interest increases over time, typically by 20% each year. Others employ the cliff grant: the employee has no interest at all for a certain period of time, after which they immediately have a 100% interest. The complete and immediate effective change could be likened to the sudden experience of falling off a cliff, hence the term.
The advantages for employers of cliff-granting in retirement programs are clear. Imposing a waiting period for full award provides the employee with an incentive to stay on the job. Another retention incentive takes over once the employee is vested; many employees, after going through the authorization waiting period, would prefer not to have to repeat the experience with another employer.
The alternative to cliff consolidation, phased or phased consolidation, usually starts earlier in a person’s employment. After a single year, for example, most plans require a 20% vesting. Thus, an employee could terminate employment and walk away with 20% of the employer’s contributions to the retirement savings plan. From the employer’s perspective, this could be seen as wasted money.
Vesting is also a feature of some employee incentive plans. Many employers grant stock options to their employees, but those options are generally not immediately exercisable. Some employers offer an incremental grant on options so that after a certain period of time, the employee has 20% interest and so on. Other employers award 100% of the award after a certain period of time, traditionally one year after the initial award. The better the employer is during that 12-month period, the more valuable the options will be and the greater the return to the employee.
Inheritance law also introduces the grant of cliffs as a way to protect an estate and its heirs. Many wills leave money and property to heirs and other beneficiaries, but often only to those who are still alive six months after the decedent’s death, accomplishing two important goals. First, in the event of a disaster that claims the lives of multiple members of a family, it avoids the problems associated with disputes over who died first. Secondly, it tries to prevent inheritances from passing from one to another and then to a third person, as well as the possible tax consequences involved. Thus, a person can be named as the beneficiary of a will, but not granted the estate until six months have elapsed, at which time the consolidation is complete.
Smart Asset.
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