C. Classifying_System of Estates (2).docx

Definitions Heirs: Persons who survive the decedent and are designated as intestate successors under the state’s statute of descent A living person has no heirs (until death) NOT JUST CHILDREN Intestate: When someone dies without a will Intestate Distribution (class ordering): Issue (die w/o issue =...

Definitions Heirs: Persons who survive the decedent and are designated as intestate successors under the state’s statute of descent A living person has no heirs (until death) NOT JUST CHILDREN Intestate: When someone dies without a will Intestate Distribution (class ordering): Issue (die w/o issue = then look to parents, collaterals, then state (escheat) Per stirpes (“by the stocks”) is an estate planning method in a will or trust that specifies that if one of your beneficiaries dies before you do, their share of your estate is divided equally among the deceased beneficiary's descendants. Children born out of wedlock get from mother and father if paternity is acknowledged or proved. Sometimes, spouses (depending on the statute) Parents Collaterals State (Escheat) Escheat (fee simple only): The state gets property in the absence of heirs Only happens when the property's last owner owns a fee simple, doesn't have a will, and has no heirs. Issue: Descendants, children, and further descendants Ancestors: Parents Collaterals: Blood relations with neither descendants nor ancestors (brothers, sisters, rich uncles, cousins, etc…) Present Estates Present possessory interest in real property Common law recognizes seven basic types of present estates: Freehold Estates (associated with ownership of real property): Fee Simple (infinite) Life Estate (limited to someone’s life) Can be a different person than the original transferee Fee Tail (“body”) largely abolished Nonfreehold Estates (leasing of real property): Terms of Years Periodic Tenancy Tenancy at Will Tenancy at Sufferance If the language of a deed/trust/will create a freehold estate, it will be one of the following: Fee Simple Absolute (usually abbreviated as “fee simple”) Fee Simple Defeasible Fee Simple Subject to a Condition Subsequent Fee Simple Determinable Fee Simple Subject to Executory Limitation 1. Fee Simple Fee simple is the default estate. A fee simple is a present estate that potentially lasts forever. It endures over time, being transferred in multiple transactions by wills, deeds, or intestate succession to a potentially infinite number of new owners. If the holder of a fee simple dies intestate (without a will) with no legal heirs = property is transferred to the state by operation of law (escheat) A fee simple is created when the grantor uses any of the following language: “O to A” “O to A and his/her heirs” “O to A forever.” Numerus clausus principle – prohibition of new or customized interests (protects property categories) Key characteristics of the fee simple are heritability and alienability. 2. Life Estate The estate is limited in duration by a person’s life (i.e., the estate terminates when the measuring life dies). Allowed grantor to control who took the property at the death of life tenant. It can be in a trust form (allows flexibility about the assets) managed by a trustee (often a bank) Always followed by a future interest: reversion in transferor or remainder in a transferee. Doctrine of waste Any damage to real property by a tenant that lessens its value to the landlord, owner, or future owner. An owner can sue for damages for waste, terminate a lease of one committing waste, and/or obtain an injunction against further waste. A life estate is created when the grantor uses any of the following language: “to A for life.” “O to A for A’s life” (A is the measuring life – life estate terminates when A dies) “O to A for B’s life” (B is the measuring life – life estate terminates when B dies) If A transfers his life estate to B, B has a life estate pur autre vie (estate measured by the life of another) Future Interests Associated with the Life Estate A future interest must follow a life estate. If possession of the land returns to the grantor immediately upon terminating the life estate = the grantor retains a reversion. If possession of the land goes to a third party immediately upon terminating the life estate = the third party holds a remainder. If there is a gap in time between the termination of the life estate and when the transferee is granted his possessory interest in the property = the transferee holds an executory interest (not a remainder). The executory interest is any future interest held by a transferee (not the transferor) that is not a remainder. 3. Fee Tail Development Originally, the tenant in possession was allowed to alienate his/her interest but not to affect the rights of his/her issue to succeed to the land upon his/her death. Could “Bar the entail” by a common recovery lawsuit, obtaining fee simple ownership & control The fee tail is a present estate that limits the estate to the transferee’s lineal blood descendants by specific words of limitation (e.g., “O to A and the heirs of his body”). Most jurisdictions have abolished the fee tail, treating any attempt to create one as fee simple. Exists only four states: Delaware, Maine, Massachusetts, and Rhode Island If a fee tail is created NOT in DE, ME, MA & RI = conferred to a fee simple! Now, it can disentail simply by conveying a fee simple by deed to another. Cannot bar the entail by will. Note that the grantor retains a reversion if there are no heirs (and no remainders in conveyance) Words of creation - “to A and the heirs of his body.” Absolute vs. Defeasible (Freehold Estates - either Fee Simple or Life Estate) Absolute = An estate is absolute if its duration is only limited by the standard limitation that defines that estate category (i.e., the estate’s “natural termination”). O conveys Greenacre to “A for life.” A holds a life estate absolute because the duration of A’s life estate is only limited by the estate’s natural termination — the end of A’s life. O conveys Greenacre to “A and her heirs.” A holds a fee simple absolute because the duration of A’s fee simple lasts forever (i.e., the estate cannot be cut short by any express language included in the conveyance). Defeasible = An estate is defeasible if it is subject to an express provision that may terminate it before its natural termination. O conveys Greenacre to “A for life on the condition that A only uses Greenacre for farming purposes.” A holds a life estate defeasible because A’s life estate is subject to an express provision that may terminate the estate before A’s death (the natural termination of A’s life estate). O conveys Greenacre to “A and her heirs on the condition that A only use Greenacre for farming purposes.” A holds a fee simple defeasible because A’s fee simple estate is subject to an express provision that may terminate the estate (notably, fee simple estates do not have a “natural termination” point as they are defined as potentially infinite). A defeasible fee is capable of lasting forever but may be terminated by the occurrence of an event. A defeasible fee gives the grantee a present possessory interest in the property but reserves a future interest in the property in favor of the grantor or a third party. A life estate is NOT usually “defeasible.” Fee Simple Defeasible (& Associated Future Interests) Determinable (FSD): A conditional conveyance in which the grantor retains a future interest: “a possibility of reverter” and vests automatically when the condition fails The holder of an FSD automatically loses the property when the condition happens (whereas with the FSSCS, the right of entry must be elected.) “Fred owns an acre of land. Fred gives the land “to Barney, as long as the land is used to plant corn.” Durational language: “While the property is used for farming,” “During the property’s use as a farm.” “Until the property is no longer used as a farm.” “For as long as the property is used as a farm.” Subject to Condition Subsequent (FSSCS): A conditional conveyance in which the grantor retains a future interest, “a right of entry” and does NOT vest automatically when the condition fails = the grantor must reclaim the property The holder of an FSSCS, the right of entry must be elected (whereas the holder of an FSD automatically loses the property when the condition happens) “To A on the condition that no car sales occur on the property.” Conditional language: “Provided that the property is used for farming.” “On the condition that the property is used as a farm.” “If the property is used as a farm” Subject to Executory Interest (Fee Simple): A conditional conveyance in which a third party (not the grantor) is granted a future interest/executory interest in the property. O conveys Greenacre “to A and his heirs, but if Greenacre is no longer used as a farm, then to B and her heirs.” A holds a fee simple subject to an executory interest because there is a conditional conveyance in which a third party, B (not the grantor), is granted a future interest in the property. If there is a close call between FSSCS & FSD most courts will find FSSCS FSD is created by “durational” language such as “so long as,” “during,” or “while,” … so the fee simple continues so long as a condition remains (or doesn’t happen). FSSCD provides the fee simple will be subject to divestment if an “event’ occurs under language such as “on that condition that” or “but if.” Note different inter vivos and devise limitations on FSSCS and FSD in some jurisdictions – p.301 Future Interests Future possessory interest in property; confers rights to enjoyment of property at a future time. Most future interests are created in the context of family wealth transfer through a trust. The Transferor’s Future Interest (the person who originally transferred the property) 1. Reversion: Life Estate Retention of the reversion does not guarantee possession in the future. If possession of the land returns to the grantor immediately upon terminating the life estate, then the grantor retains a reversion. Example: O conveys Blackacre “to A for life.” O has a reversion in fee simple that is certain to become possessory. At A’s death, either O or O’s successors in interest will be entitled to possession. Example: O conveys Whiteacre “to A for life, then to B and her heirs if B survives A.” O has a reversion in fee simple that is not certain to become possessory. If B dies before A, O will be entitled to possession at A’s death. B = contingent remainder If A dies before B, O’s reversion is divested on A’s death and will never become possessory. 2. Possibility of Reverter: FSD Possibility of Reverter = A future interest remaining in the transferor or his heirs when a fee simple determinable is created. The possibility of reverter vests automatically when the condition fails (i.e., the grantor does not have to reclaim the property, the interest automatically vests back to him). Example: O conveys Blackacre to Hartford School Board so long as used for school purposes.” O has a possibility of reverting. 3. Right of Entry: FSSCS When an owner transfers an estate subject to condition subsequent and retains the power to cut short or terminate the estate, the transferor has a right of entry. The right of entry does NOT vest automatically when the condition fails (i.e., the grantor must reclaim the property) Example: O conveys Whiteacre “to Hartford School Board, but if it ceases to use the land for school purposes, O has the right to re-enter and retake the premises.” The Transferee’s Future Interest Terminology Condition subsequent: “afterward” Example: (FSSCS) O to A but if A is no longer a licensed attorney. O has a right of re-entry A has the property and then SUBSEQUENTLY A can lose the property Example: O to A but if A opens a McDonalds, O has a right to reentry The condition occurred afterward, O has the right of reentry Condition precedent: “beforehand” (something must occur for the condition remainder to kick-in) Example: O to A for life, then to B, if B passes the bar There is a thing that must occur (passing the bar) before B gets the estate Example: O to A for life then to B if B passes the Bar, but A may die before B passes the Bar O would have a reversion B can pass the bar in A’s lifetime and O would not have a reversion. The types of future interests in transferees: 1) remainders (vested & contingent remainders), 2) and executory interests. ….once created, a remainder or executory interest can be transferred back to the grantor, but the name originally given the interest does not change. 1. Remainders Vested: A remainder is vested if: (1) it is given to an ascertained person and (2) it is not subject to a condition precedent (other than the natural termination of the preceding estates). … and is ready to become possessory whenever and however all preceding estates expire. Contingent: A remainder is contingent if: (1) it is given to an unascertained person or (2) it is contingent upon some event occurring other than the natural termination of the preceding estates. = a condition precedent? Example: O to A for life, then to B if B passes the bar. B has a contingent remainder Condition precedent (B needs to pass the bar) O conveys “to A for life, then to B and her heirs if B survives A.” The language “if B survives A” subjects B’s remainder to a condition precedent. B can take possession only if B survives A. Vested (remainder) subject to complete divestment/defeasance This is a remainder that is vested but subject to a condition subsequent. If the event which is the subject of the condition happens, the remainder is divested. Example: O to A for life, then to B (vested remainder), but if B does not the bar, then to C. B has a vested remainder subject to complete divestment C has shifting executory interest in fee simple. Vested (remainder) subject to open/partial divestment A remainder created in a class of persons (such as in A’s children) is vested if one member of the class is ascertained, and there is no condition precedent. The remainder is vested if later-born children are entitled to share in the gift. O to A for life then to B’s heirs. A and B are both alive when conveyance has 1 heir. Even if B has no heirs. 2. Executory Interests An executory interest is a future interest in property that will be triggered on the happening of a stated event and will pass the property to a third party. Shifting Executory Interest Divests or cuts short some interest in another transferee Is the 3rd person divesting a transferee or transferor? If transferee = “shifting” O to A, but if A fails the bar exam, then to B B has a shifting executory interest. B is divesting the transferee (A) Example: O gives Greenacre to Charitable Land Trust, but if used for residential purposes, then to Space, Inc. After conveyance, CLT has FSSEL in GA, and Space has shifting executory interest in FS. Immediate transfer of title. RAP problem unless Space is non-profit. Springing Executory Interest Divests or cuts short the future transferor in the future Example: O to A, if A passes the bar exam A has a springing executory interest? Example: O to A upon graduating from law school. A is alive and in college at conveyance. A has a springing executory interest in FS. O has fee simple subject to executory limitation. Vests immediately upon l.s. Grad. Example: O conveys “to A and his heirs, but if A dies without issue surviving him, to B and her heirs.” A has a possessory fee simple subject to an executory limitation (or subject to divestment by B’s executory interest). B’s future interest can become possessory only by divesting A. Example: O conveys “to A for life, then to B and her heirs, but if B dies under the age of 21, to C and her heirs.” B is age 15. B has a vested remainder in fee simple subject to an executory limitation (or subject to divestment by C’s executory interest if B dies under age 21). Example: O conveys “to Hartford School Board, but if the premises are not used for school purposes during the next 20 years, to Town Library.” The School Board has a fee subject to an executory interest that will automatically divest the Board’s fee if the condition happens. In this respect the executory interest differs from a right of entry in O, which is optional, not automatic in divesting. Example: O conveys “to Hartford School Board so long as the premises are used for school purposes, then to Town Library.” The School Board has a fee simple determinable followed by an executory interest. Town Library has an executory interest. 1. Executory Interest: FSSEL & Life Estate A future interest in someone other than the transferor that can take effect only by divesting another interest Life Estate: If there is a gap in time between the termination of the life estate and when the transferee is granted his possessory interest in the property, then the transferee holds an executory interest (not a remainder). Shifting Executory Interest Divests or cuts short some interest in another transferee Is the 3rd person divesting a transferee or transferor? If transferee = “shifting” O to A, but if A fails the bar exam, then to B B has a shifting executory interest. B is divesting the transferee (A) Example: O gives Greenacre to Charitable Land Trust, but if used for residential purposes, then to Space, Inc. After conveyance, CLT has FSSEL in GA, and Space has shifting executory interest in FS. Immediate transfer of title. RAP problem unless Space is non-profit. Springing Executory Interest Divests or cuts short the future transferor in the future Example: O to A, if A passes the bar exam A has a springing executory interest? Example: O to A upon graduating from law school. A is alive and in college at conveyance. A has a springing executory interest in FS. O has fee simple subject to executory limitation. Vests immediately upon l.s. Grad. 2. Remainder: Life Estate A future interest created in someone other than the transferor that, according to the terms of its creation, will become a present estate (if ever) immediately upon, and no sooner than, the expiration of all prior particular estates created with it. Created in someone other than the transferor Capable of becoming possessory immediately upon termination of the prior estate Follows a “particular” estate (one less than a fee simple) Life Estate: If possession of the land goes to a third party immediately upon terminating the life estate, then the third party holds a remainder. If the remainder is NOT contingent it is vested Contingent Remainder (1) it is given to an unascertained person or (2) it is made contingent upon some event occurring other than the natural termination of the preceding estates. In the latter situation, the remainder is said to be subject to a condition precedent. Example: Vested Remainder A remainder is vested if: 1) when the property can't vest because the beneficiary is unknown (for example, if the beneficiary is a class subject to open). It needs to be created in a living/ascertainable person; or Heirs are NOT ascertainable. 2) NOT subject to any condition precedent A condition precedent is an event (other than the natural termination of the prior estate) that must occur before the remainder can become a possessory estate. i.e., age. Vested Remainder Indefeasible OR “vested remainder” There is 100% certainty. We know the parties and no uncertainties. Vested Remainder Subject to Open (sometimes called “subject to partial divestment”) A remainder created in a class of persons (such as in A’s children) is vested if one class member is ascertained, and there is no condition precedent. The remainder is vested if later-born children are entitled to share in the gift. Vested Remainder Subject to Divestment A remainder created in a class of persons (such as in A’s children) is vested if one class member is ascertained and there is no condition precedent. The remainder is vested if later-born children are entitled to share in the gift. Example O conveys “to A for life, then to B and her heirs, but if B does not survive A to C and his heirs.” B does not have a contingent remainder. B’s remainder is vested, not contingent, because it is subject to a condition subsequent. C has a shifting executory interest which can become possessory only by divesting B’s remainder. In either situation (owner unascertained or subject to condition precedent), the remainder is not now ready to become possessory upon the expiration of the preceding estate. Knopf v. Gray (2018) Facts: Vada Wallace Allen left a will devising various properties for her children and instructing that the property be passed down to their children. Allen’s will contained a provision devising her land to her son, William Gray. The provision stated that Gray was to maintain the land. The provision also prohibited Gray from selling the land, which could be passed down to his three children. After Gray sold the land to Polasek Farms, LLC (collectively, Gray), two of Gray’s children, Annette Knopf and Stanley Gray (collectively, Knopf), filed an action in Texas state court. Knopf sought a declaration that Allen had devised a life-estate interest to Gray, which prohibited the sale. Gray argued that Allen had devised a fee-simple interest in the property. Gray also argued that the instructions indicating the land was not to be sold constituted an invalid restraint on sale and that Allen's language did not have the legal effect of creating a life estate. Rule: A testator has unambiguously intended to devise a life-estate interest in land by requiring the land to be maintained and passed down to family members. The Trust Snape Video | Dead Hand Control Justification The deceased “earned,” kept control, did not lose, or otherwise had the money to “give” to the living. Society would harm incentives to earn if it did not allow inheritance or, more specifically, did not allow the deceased to exercise control over the inheritance. Problems Can tie up land Prevents the present possessor from being able to enjoy their present rights fully. (Problem of First-Generation Monopoly) Prevents property from being allocated through the market to the most efficient use. (Problem of Inalienability) Partial SOLUTION: Trust control splitting legal and equitable ownership. Inequitable Alienabiltity The Rule Against Perpetuities A common law property rule states that no interest in land 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. No interest is good unless it must vest, if at all, 1) not later than twenty-one years 2) after some life in being 3) at the creation of the interest Categories subjected to RAP Contingent Remainders Executory Interests Class Gifts (a particular subset of both) Rule of Logical Proof If you can think of any way that the interest might not vest in the lives in being plus the 21 years, then RAP is violated. The 5-Step Approach Issue: When the instrument took effect, was the purported future interest created in the transferee valid or invalid? “The time the instrument took effect” = a deed, will, the moment the instrument took effect! Determine whether the future interest at issue is subject to the Rule Against Perpetuities. Determine when the perpetuity window begins. Determine what must happen for the future interest to vest or forever fail to vest (and for the class to close if the future interest holder is a class member). Identify the relevant lives in being that can be used at the initial point in the perpetuity window. Using only facts that exist when the perpetuity window begins (see step 2), test each relevant life to determine if anyone can validate the future interest. Step 1: Determine whether the future interest at issue is subject to the Rule Against Perpetuities. RAP only applies to three types of future interests: Contingent remainders Vested remainders subject to opening Executory interests that are contingent Two limited exceptions: Charity-to-Charity Exception: A future interest that is held by a charity-transferee that was transferred to the charity-transferee by a charity-transferor is not subject to the Rule Against Perpetuities. Options Held by Nonfreehold Tenants Exception: A future interest in the form of an option to purchase real property that is held by a nonfreehold tenant who is leasing the property is not subject to the Rule Against Perpetuities. Step 2: Determine when the perpetuity window begins. Begins at the moment when the instrument that creates the future interest becomes legally effective. 3 main types of instruments are used to transfer real property: a deed; a will; and a trust. Deed = takes legal effect when the deed is delivered by the grantor. “Conveys” Will = takes legal effect when the testator dies. “Devises” Testamentary Trust (a trust created under a will) = takes legal effect when the settlor (the person creating the trust) dies. An in inter vivos trust = takes legal effect when it becomes irrevocable (e.g., when the settlor declares that the trust is irrevocable or — if the settlor makes no such declaration — when the settlor dies). Step 3: Determine what must happen for the future interest to vest or forever fail to vest. Future interest = vests when it is no longer contingent or subject to open. Contingent remainder = vests when all of its condition precedents are satisfied and the holder of the remainder is ascertainable. Contingent executory interest = is usually contingent upon the occurrence of a future event. It is considered vested upon the occurrence of that future event. An issue with RAP, when does the interest FAIL to vest! Class gifts (gifts to a class/group of persons — e.g., vested remainders subject to open) Governed by the “all-or-nothing” rule: the interests of ALL class members must satisfy the Rule Against Perpetuities for the interest of ANY class member to be valid (i.e., “bad for one, bad for all”). Also, for a future interest that is a part of a class to be valid, it must be proven that the class will close within the perpetuity window. A class closes on the first of two alternatives: When no new members can be added to the class (usually due to the death of an identified ancestor); OR Under the rule of convenience, when any class member is entitled to possession of his or her share after the prior estate ends. Step 4: Identify the relevant lives that can be used at the initial point in the perpetuity window. A relevant life = a person alive at the time the instrument becomes effective who can affect the vesting of the future interest — including, but not limited to: The holder of the interest; The person creating the interest; Any person who can affect a condition precedent attached to the interest; AND Any person who can affect the identity of the holder. Step 5: Using only facts that exist when the perpetuity window begins (see step 2), test each relevant life to determine if anyone can validate the future interest. We only need to find ONE relevant life that can validate the future interest to satisfy RAP. This involves a “trial and error” process of plugging relevant lives into our formula to test whether it is logically provable that the interest will either vest or forever fail to vest within the perpetuity window. Limitations/Reforms to RAP Savings Clauses Cy pres/Wait and see RAP statutes and CA Malpractice story Perpetual Trusts