Future interest
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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; that is, an estate with a condition or event triggering transfer of possessory ownership. A common example is the landlord-tenant relationship. The landlord may own a house, but has no general right to enter it while it is being rented. The conditions triggering the transfer of possession, first to the tenant then back to the landlord, are usually detailed in a lease.
As a slightly more complicated example, suppose O is the owner of Blackacre. Consider what happens when O transfers the property "to A for life, then to B." Person A acquires possession of Blackacre. Person B does not receive any right to possess Blackacre immediately; however, once person A dies, possession will fall to person B (or his estate, if he died before person A). Person B has a future interest in the property. In this example, the event triggering the transfer is person A's death.
Because they convey ownership rights, future interests can usually be sold, gifted, willed, or otherwise disposed of by the beneficiary (but see Vesting below). Because the rights vest in the future, any such disposition will occur before the beneficiary actually takes possession of the property.
There are six kinds of future interests recognized at common law: three in the transferor and three in the transferee. See Jesse Dukeminier & James E. Krier, Property 270-274 (5th ed. 2002).
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[edit] Vesting
Vesting means granting a person an immediate right to present or future enjoyment of property. In plain English, one has a right to a vested 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.
A vested interest may be one of three types:
- A future interest is absolutely (or indefeasibly) vested if its beneficiary must (legally) eventually take possessory ownership.
- A future interest is vested subject to open if it belongs to a class of beneficiaries, where that class can expand. A common example is a grant from O "to A's children": the class of A's children can't be closed until approximately thirty eight weeks after A dies, so any children alive at the time of the grant are vested subject to open. This interest is also sometimes referred to as being vested subject to partial divestment.
- A future interest is vested subject to divestment if it will vest in its beneficiary unless that person violates a condition laid out in the grant.
A person may divest themselves of, or alienate, only those interests that are guaranteed to vest. This rule aligns with the policy that a person should not be allowed to sell a thing that he or she does not own outright. Interests that are not guaranteed to vest are subject to the rule against perpetuities.
[edit] Future interests in the transferor
[edit] Reversion
A reversion occurs when a granted estate is absolutely vested in the grantor.
- Example: "O grants Blackacre to A for life."
- Analysis (O): A is guaranteed to die (eventually), at which point Blackacre returns to O. This future interest is absolutely (indefeasibly) vested in O.
- Analysis (A): A has a life estate.
- Alienation: O can alienate her future interest. A can alienate his rights in the property, but only to the extent that those rights were granted him (i.e., as a life estate). So A can sell Blackacre to B, but once A dies it returns to O. Notice that B has no control over this kind of vesting.
Reversion is not subject to the rule against perpetuities, because O's future interest is absolutely vested.
[edit] Possibility of reverter
There is a possibility of reverter when an estate will return to the grantor if a condition is violated.
- Example: "O grants Blackacre to A, for as long as A refrains from drinking alcohol."
- Analysis: If A never drinks after the grant (and never sells the property), then Blackacre will belong to A at A's death, and be distributed according to the rules of probate. If A does drink after the grant, then the property returns to O.
- Language used: Durational. Examples include "for as long as", "while", and "during".
- Alienation: A is vested, subject to divestment. O cannot alienate this future interest, because it may never vest in O. Thus, this interest is subject to the rule against perpetuities.
This type of future interest is called fee simple determinable. The vesting of the future interest is determinable at the time of the grant, because reverter is automatic if the condition is broken.
[edit] Right of entry (or power of termination)
A grantor has the power of termination when an estate will return to the grantor if a condition is violated and the grantor decides to reclaim the estate. This type of grant may occur when the grantor wants the option of deciding the severity of the violation.
- Example: "O grants Blackacre to A, on condition that A refrains from drinking alcohol."
- Analysis: If A never drinks after the grant (and never sells the property), then Blackacre will belong to A at A's death, and be distributed according to the rules of probate. If A does drink after the grant, then A's rights in Blackacre end, although A is still in possession of Blackacre.
- Language used: Conditional. Examples include "on condition", "if used for", and "provided that".
- Alienation: A is vested, subject to divestment. O cannot alienate this future interest, because it may never vest in O. This interest is subject to the rule against perpetuities.
This type of future interest is called fee simple subject to a condition subsequent. To see why, consider that in order to retain Blackacre, A must continue to perform under the terms of the grant (by not drinking). If A fails to 'not drink', that condition will trigger the subsequent loss of A's rights in Blackacre.
[edit] Future interests in a transferee
[edit] Remainders
A remainder is a future interest in a third party that vests upon the natural conclusion of the grant to the original grantee. It is the interest in the property that is 'left over', or remains, after the original grantee is finished possessing it. For example, O's grant "to A for life, then to B" creates a remainder in B. There are two types of remainders: vested and contingent.
[edit] Vested remainders
A vested remainder is created when property is granted to both a direct grantee and a named third party, and is not subject to a condition precedent to the third party taking possession.
- Example: "O grants Blackacre to A for life, then to B".
- Analysis (A): A has a life estate.
- Analysis (B): B has a vested remainder, because Blackacre will vest in B after A dies, with no further conditions.
- Alienation: B may divest his (absolutely) vested remainder, which is not subject to the rule against perpetuities. A is subject to the rules regarding divestiture of a life estate, as noted above.
[edit] Contingent remainders
A contingent remainder is created when a remainder cannot fully vest at the time of granting. This normally occurs in two situations:
- when the property can't vest because the beneficiary is unknown (for example, if the beneficiary is a class subject to open), or
- when the property can't vest because the (known) beneficiary is subject to a condition precedent which has not yet occurred.
[edit] Remainders subject to open
- Example: "O grants Blackacre to A for life, then to B's children".
- Analysis: The class of B's children can't be determined until approximately thirty eight weeks after B dies, so any children who are unborn at the time of the grant have a remainder contingent upon B having offspring. Children of B are fully vested as soon as they are born, provided A is still alive. There is an ambiguity if A dies before B, since B could continue having children, who might or might not have an interest in Blackacre depending on jurisdiction.
[edit] Remainders subject to condition precedent
- Example: "O grants Blackacre to A for life, then to B if B is married to C (at the time A dies)".
- Analysis (O): If B is married to C when A dies, B will own Blackacre. If B isn't married to C, then the property will vest in O (or O's estate) without O having to make a claim for it. So O has a possibility of reverter.
- Analysis (A): A has a life estate.
- Analysis (B): B has a contingent remainder subject to condition precedent, because Blackacre will vest in B, but only if B is married to C at the moment A dies.
- Alienation: B does not vest unless he is married to C at the moment of A's death. In other words, he will have to wait until A dies to divest.
Note: a different result would be reached if the grant was "O to A for life, then to B if B has married C". In this case, B could marry C to obtain a fully vested interest, then divorce C without affecting his rights to Blackacre.
Legislatures and courts tend to prefer vested remainders over contingent remainders, to reduce uncertainty in ambiguous grants, and to speed up probate.
[edit] Executory interests
An executory interest is a future interest in a third party that vests upon any condition subsequent except the natural termination of the original grantee's rights. In other words, an executory interest is any future interest held by a third party that isn't a remainder. Executory interests usually arise when a grantor gives property to one person, provided that they use it a certain way. If the person fails to use it properly, the property transfers to a third party.
Executory limitations transferring ownership from the grantor to a third party are called springing executory interests, and those that transfer from the grantee to a third party are called shifting executory interests.
The grantor never retains an ultimate future interest when there is an executory condition present. To see why, note that if the executory condition is never met, the original grantee retains the interest, while if the condition is met, the interest transfers to a third party. However, the grantor may have a future possessory interest, as the second example below shows.
Executory interests are subject to the rule against perpetuities. However, if all of the potential vesting beneficiaries are named, the rule will never be violated.
Third party beneficiaries of executory interests cannot alienate them, since the interests are contingent upon a condition subsequent, so the interest is not guaranteed to vest.
[edit] Shifting executory interests
- Example: "O grants Blackacre to A for life, but if A ever drinks alcohol, then Blackacre immediately goes to B."
- Analysis (O): O has a right of reentry (see above), because A might drink alcohol.
- Analysis (A): A has a life estate.
- Analysis (B): B has an executory interest, because his interest does not vest unless A's life estate terminates due to the 'unnatural' condition subsequent. The interest is shifting, because if A drinks, then the property "shifts" from one grantee to another.
[edit] Springing executory interests
Suppose B is 15 years old.
- Example: "O grants Blackacre to A for life, then to B if B reaches the age of 25 years."
- Analysis (O): O has a reversion (see above), since A might die before B reaches 25.
- Analysis (A): A has a life estate.
- Analysis (B): B has an executory interest, because his interest does not vest until he reaches 25, a condition that is unrelated to the expiration of A's interest. If A lives until B is 25, B's interest will vest absolutely. If not, the interest is springing, because when B reaches 25 possession of Blackacre will "spring" from the grantor O, who will have taken possession when A died.
