Property Law Spring 2017

Professor Marc H. Greenberg

Golden Gate University School of Law

Possessory Estates, Future Interests

 Possessory Estates, Future Estates
• Key Terminology
– Heirs – if a person dies intestate, real property goes to her/his heirs
(does not include spouses)
– Issue – children and grandchildren
– Ancestors – parents, who will take if their child dies without issue
– Collaterals – blood relatives (includes brothers, sisters, aunts, uncles,
etc.)
– Escheat – if a person dies intestate w/o heirs, their property goes to the
state
– The Life Estate – a way to control inheritance (to A for life, remainder
to B) – every life estate is followed by a future interest
• Objections to Restraints on Alienation:
– 1) they make property unmarketable; 2) they perpetuate wealth
concentration; 3) they discourage improvements on land; and 4) they
prevent creditors from reaching the property as security for debt.
 Possessory Estates, Future Estates
• Legal Life Estates v. Trusts
– Problems with legal life estates:
• Cannot sell the property unless all other persons having an interest in it agree;
• Cannot lease it beyond the life tenants’ life span;
• Difficult to obtain a mortgage on, as the security is too uncertain;
• Remaindermen may bring suit for waste if you take minerals or other resources out,
or seek to take down usable buildings
• Issues arise in insurance claims – who is entitled to recovery if life tenant pays all
premiums?
• Legal life estates in personal property generally view the life tenant as a trustee, with
fiduciary obligations to protect the assets for the remindermen
– The Better Approach – Trusts
• Trusts are more flexible, and the trustee (which may or may not be the life tenant –
and often isn’t) holds the legal fee simple, and is charged with managing the
property, with specific, enumerated powers set forth in the trust, or in relevant trust
statutes. The trustee is obligated to administer the trust for the benefit of the life
tenant and the remaindermen.
 Possessory Estates, Future Estates
• The Theory of Waste
– Waste occurs when A, in possession of property for the benefit, in
whole or in part, of B, uses the property in a manner that unreasonably
interferes with the expectations of B.What conduct constitutes waste is
often the subject of dispute, because the interests involved may not be
mutual.
– Courts have created two general categories of waste: Affirmative waste
arising from voluntary acts that are claimed to result in serious injury
to the property (such as tree logging, mining, etc.); and Permissive
waste, arising from a failure to act, usually involving a failure to
maintain and/or care for the property.
• Woodrick v. Wood
– Is tearing down a barn that still has some cash value waste, when the
removal of the barn will enhance the overall value of the property?
– No says the Court, although it is also fair that the remaindermen
receive some compensation for the loss of the value of the barn
 Possessory Estates, Future Estates

• Woodrick v. Wood
– Is tearing down a barn that
still has some cash value
waste, when the removal of
the barn will enhance the
overall value of the
property?
– No says the Court, although
it is also fair that the
remaindermen receive
some compensation for the
loss of the value of the barn
 Possessory Estates, Future Estates

• Defeasible Estates – an estate in land that terminates upon the

occurrence of a specified future event
– Fee Simple Determinable - ends automatically when a stated event
happens – always accompanied by a future interest, called a possibility
of reverter
– Fee Simple Subject to Condition Subsequent – does not automatically
terminate, but may be cut short or divested at the transferor’s election
when a stated condition happens. The grantor, and no one else, has the
discretion to re-enter and take the premises
– Fee Simple Subject to Executory Interest – similar to the first two, but
when the triggering event occurs, the power to end the grant is in the
hands of a third party – that future interest in this third party is called
an executory interest
– The Restatement (Third) proposes merging the three into one: the Fee
Simple Defeasible
 Possessory Estates, Future Estates

• Future Interests confer rights to the enjoyment of property at a future time; they are usually
created as part of a trust, giving the trustee legal title to the trust assets in fee simple during
the term of the trust (which can span lifetimes – using either successive trustees, or an entity,
like a Bank’s trust department, to serve as trustee), subject to the beneficial interests of the
children or other devisees or heirs of the trustor. The trustor has a life estate, and the children
have a vested remainder.
• The Trust –
– The key in understanding trusts is to understand that they involve three different categories of
participants: the trustor, the trustee, and the beneficiaries.
– The trustor is the owner of the property placed into trust, whose intent may be to retain a life
interest, or may be simply to place the assets in trust for the beneficiaries;
– The trustee holds legal title to the property in the trust, and is charged with the fiduciary duty
of managing those assets for the benefit of the beneficiaries – and as the holder of legal title,
the trustee holds great power over the property, and is some cases, over the beneficiaries’ lives
as well
– The beneficiaries will, during the term of the trust, receive its net income, and upon
termination of the trust, they will receive the assets in the trust.
– Since beneficiaries have no control over the trust assets, those assets are also beyond the reach
of creditors of the beneficiaries – a structure that allows for the establishment of “spendthrift”
trusts.
 Possessory Estates, Future Estates

– Broadway Nat’l Bank v. Adams – the purpose of the spendthrift trust is to make
sure that the donor’s intent that the assets transferred be used for the benefit of
the donee, and not to pay creditors of the donee, is secured.
– Creditors who complain that they were misled by the donee as to the state of
the donee’s finances, and loaned money or gave credit in reliance thereon, have
a duty of due diligence to overcome before they can successfully make such a
claim – a duty they cannot overcome, because they can, without much effort,
determine the true source of the income.
•The Rule that Remains: The Rule Against Perpetuities
–At Common Law – “No interest is good unless it must vest, if at all, not later
than twenty-one years after some life in being at the creation of the interest”.
– This is a compromise of the interests of the courts in encouraging marketability,
and wealthy owners who want to keep property in the family via contingent
remainders. This allows property ownership to be tied up by contingent interests
– but only for lives in being plus 21 years thereafter. So it allows property to be
transferred to people now alive, and their next generation – but that’s all.
 Possessory Estates, Future Estates

• The Perpetual Trust –

– The viability of the Rule Against Perpetuities is fading for a variety of
reasons. For tax reasons, wealthy people set up what are referred to as
perpetual trusts, so as to avoid the Generation Skipping Tax they would
otherwise have to pay on property transfers to devisees.
– Of greater significance is the change in how wealth is created, preserved
and passed on to future generations. The vast majority of wealthy
people hold very little of their wealth in real property any more. Most of
the wealth is held in personal property, primarily in equities (stocks and
bonds), which are not subject to the Rule, and have no impact on the
alienability of property
– The authors predict that as a result of these changes, the Rule won’t be
taught in very many law schools in 50 years. Something for future
generations to look forward to.