Estates and Future InterestsSOMETIMES AN ASSET IS BEST OWNED by more than one person. This chapter deals with some basic ways for owners to divide or share ownership—over time and simultaneously, including between spouses.
Estates and Future InterestsThe common law developed a very elaborate classification system for temporal divisions of property and rules for implementing that system. The study of estates and future interests was once the core of the traditional property course, but it is increasingly doubtful that this emphasis makes sense. To be sure, the vocabulary developed by the common law is still used to describe interests in family trusts (see Chapter 6). The Rule Against Perpetuities (RAP), which places limits on the control a current owner can exercise over future uses of the owner’s asset, still casts its shadow over trusts and certain kinds of option contracts. And lawyers who work with charitable gifts need to know something about defeasible fees. But these areas of practice describe a relatively small portion of contemporary property law.
The common law system of temporal classification is nevertheless of considerable ongoing significance for anyone interested in exploring the nature of law. The system of estates and future interests is the nearest thing in the common law to a regime of rules, as opposed to general principles or standards. Generally speaking, a rule is a directive that prescribes an unambiguous response to a defined set of circumstances. “Maximum speed 65 mph” is an example. Rules are designed to be applied without any need for the exercise of discretionary judgment. Thus, rules are said to have the capacity to control behavior ex ante, before the behavior governed by the rule takes place. By contrast, a standard is a directive that describes a goal or purpose in a particular set of circumstances. “Drive at a reasonable speed given road conditions” is a standard. Application of a standard requires the exercise of discretionary judgment. Hence it is often said that whether one has conformed one’s behavior to a standard can only be determined ex post, typically by some higher authority, after the behavior governed by the standard takes place.
The common law system for dividing property over time was developed by legislatures, judges, and lawyers to allow persons to prescribe what would happen to their property after their death. The aspiration was that people with significant property could, in consultation with a competent lawyer, create a temporal division of the property by will, deed, or trust that would precisely match their intentions about who would take what and when in the future. Because of the rule-like nature of the system, those having an interest in the property after the death of the owner, again with the help of lawyers, could faithfully carry out these intentions without recourse to litigation.
The resulting system tells us a great deal about what it is like to be governed by rules. On the one hand, the categories are sufficiently numerous and the operating principles sufficiently flexible that they can accommodate virtually any set of intentions. Consequently, the system promotes individual autonomy in determining how property will be distributed after death. It also appears that the rules have been generally successful in avoiding litigation (although not entirely of course). On the other hand, the system is complex and difficult to master. Only a lawyer can maneuver through the somewhat arcane rules with confidence. And the rules have an increasingly musty feel as time marches on. Updating and simplification would be highly desirable, but legislatures tend to have much more pressing things to attend to. The legal profession, which has invested so much in mastering the rules, has little incentive to work for streamlining that would allow accountants, Internet-based providers, or paraprofessionals to take over the task of estate planning.
The common law system of temporal classifications of interests assumed its most highly articulated form with respect to interests in land, often called “estates” in land. During the period of the development of the common law in England, land was the most important source of wealth and status. Land is also an extremely durable asset, so divisions of interests over time were both feasible and potentially problematic, insofar as they could tie up the ownership and use of an important asset for long stretches of time. Today it is often assumed that this complex system of estates also applies to personal property. Yet one rarely sees the categories of the estate system applied to personal property, except in the context of trusts composed of personal property in stocks and bonds, and (very occasionally) to works of fine art. The primary reason for this is probably that personal property is less durable than land. We take up trusts in Chapter 6.
If one were designing a system of estates in land and future interests from scratch, one might start with something called full ownership. Next we would want to divide property temporally between an owner who has a present possessory interest less than full ownership, and one or more owners of future rights. Conceivably, we could have a system composed of just full ownership, one type of present interest, and one type of future interest, and allow some tweaking of present interest and future interest in terms of how long they last, and in the case of the future interest, when it becomes possessory. This would make property law much simpler, and little if anything of social value would be lost. England has moved in this direction through legislative reforms. American law reformers have regularly proposed a similar simplification of American law, so far with little to show for their efforts.
For the time being, therefore, the student of American law must learn a more elaborate vocabulary of full ownership, present possessory interests, and future interests, bequeathed to us from the common law. This system traces back to the feudalism that grew up especially after the Norman Conquest in 1066. Under the feudal system, the king would grant limited rights or tenures to lords in return for services; these lords in turn would grant lesser interests or tenures in return for services; and the process would continue all the way on down to peasants who actually worked the land, again in return for services. Feudalism was abolished during and after the English Civil War of the seventeenth century, and for our purposes, the feudal legacy is mostly important in terms of the terminology used to describe the various types of present and future interests (still sometimes called “tenancies”). Perhaps the best way to think of the interests we are about to describe is as variations on our ideal of full ownership, present interest, and future interest, with the additional complication that many of the interests have distinguishing features so tightly built into them that they affect the name of the interest. For historical reasons these interests are also said to be “freehold interests,” as opposed to nonfreehold (leasehold) interests (see Chapter 6, on leasing), which were subject to fewer formalities upon transfer. The freehold-nonfreehold distinction is today of limited relevance.
The chart on the next page summarizes the principal categories of full ownership, present possessory interests, and future interests that characterize the system of estates in land derived from the common law.
In considering how this system operates, it helps to think of each of the interests (other than full ownership) as part of a pair of interests—the present possessory estate and the corresponding future interest or interests. Each paired set of interests sums to the equivalent of full ownership. Or to put it another way, when full ownership is divided over time, the parts that are created include a present interest paired with one or more future interests that exhaustively distribute all of what the full owner had before the division took place.
Under the common law system, the interest that corresponds to full ownership is called the fee simple absolute (or fee simple or fee for short) in the case of land and full or absolute ownership in the case of personal property. One creates a fee simple in A by granting “to A and his/her heirs,” “to A in fee simple,” or (these days) simply “to A.” If the traditional “and his/her heirs” language is used, it is important to recognize that this is just a phrase. A does not have heirs until A dies, and so we say the word “heirs” here is part of the “words of limitation” (words that describe the interest). Only “words of purchase” tell us who gets the interest, and in all three formulations that part is “to A.”
The fee simple not only gives the full package of rights, duties, and powers we saw in Chapter 4, it is also indefinite along the temporal dimension—it comes to no natural end. When the owner dies, a successor by will or intestacy simply steps into the fee owner’s shoes. The fee simple is a present possessory interest, but, because it is of indefinite length, it leaves no room for a future interest. So in this one case there is no paired future interest that corresponds to the present interest. The present interest is everything.
The most common form of present interest—that is, a present possessory interest less than a fee simple—is the life estate. A life estate, as in “to A for life” grants full rights of possession to life tenant A (“tenant” is sometimes used to refer to the holder of an interest, in an echo of feudalism) during A’s natural life, but only for the duration of A’s natural life. The interest abruptly comes to an end upon the death of the holder of the life estate. The holder of a life estate can transfer the interest to someone else, but that person will hold only until the death of the original life tenant. The transferee in these circumstances is said to have a life estate per autre vie—a life estate for the life of another.
Because a life estate is of more limited duration than a fee simple, there is always something left over at the end of the life estate, and so a life estate is always paired with one or more future interests. Here, the most basic division is between a future interest retained by the grantor and a future interest in some person other than the grantor. If the future interest holder is the grantor him or herself, the future interest is called a reversion. This can be explicit as where O grants “to A for life, and then to O.” Or it can be implicit, as where O grants simply “to A for life.” Because there is something left over after the grant to A, the system of estates in land implies a reversion in the grantor. If the grantor holds a reversion and is dead when A dies, the land reverts to the grantor’s successors, because the reversion passes under the grantor’s will, or if the grantor has no will, by intestate succession to the grantor’s legal heirs.
If the person who gets the land after the life tenant is someone other than the original grantor, the future interest is called a remainder. So if O grants “to A for life, then to B,” B has a remainder. Remainders are further subdivided into vested remainders and contingent remainders. Some remainders have a built-in uncertainty about them. Thus, some remainders are contingent, as where O grants “to A for life and then to B if she has passed the bar.” Here the remainder is contingent on the event of B’s passing the bar. Once B has passed the bar, the remainder becomes a vested remainder (vested in interest, but not yet vested in possession—that will occur only when A dies). Another type of uncertainty can revolve around who exactly will have the remainder. So for example, if O grants “to A, then to the children of B,” we don’t know until B has died who the set of B’s children might be. (If B already has children such a gift is said to be “vested subject to open” or “vested subject to partial divestment.”)
These various distinctions among future interests that follow a life estate are relevant primarily because of the Rule Against Perpetuities (or RAP, considered more fully below). Reversions in the grantor, whether express or implied, are regarded as vested from the moment they are created, and are not subject to the RAP. Likewise, vested remainders are immune from invalidation under the RAP. Contingent remainders, however, can be invalidated if it they might vest after the period defined by the RAP. This applies to remainders that are contingent because of some condition that must be satisfied before the vesting (such as passing the bar) as well as to remainders that are contingent because the identity of the remainder-persons has not yet been established (as in a gift to “children”).
The only other significant category of estates consists of a variation on one theme—the defeasible fee. A defeasible fee is like the fee simple absolute except that it can end upon the happening of some event—so it too is less than a fee simple absolute. Defeasible fees are largely encountered today in connection with charitable gifts. For example, a grantor will give Blackacre “to the school district, so long as it is used for school purposes.” The objective is to limit the future use of the property to the particular charitable purpose that the grantor seeks to promote, here, its use as the site for a school. If the donee, the school district, ceases to use the property for school purposes, it suffers a forfeiture of the charitable gift—which is a powerful incentive to abide by the donor’s wishes.
Defeasible fees can be classified along two dimensions: according to whether the condition that can lead to forfeiture of the defeasible fee operates automatically or not, and according to whether the corresponding future interest belongs to the grantor or to some person other than the grantor. Because there are two choice points here—automatic versus nonautomatic and future interest in grantor versus third party—one would think that there would be four types of defeasible fees; but one would be wrong. Instead there are just three.
Consider the situation in which the future interest is in the grantor, that is, defeasible fee plus grantor future interest. Here the terminology of the present possessory interest—the defeasible fee—varies according to whether the future interest kicks in automatically or not. If it is automatic, we have a fee simple determinable. The corresponding future interest is called a possibility of reverter. So if O grants Blackacre “to A so long as drugs are not consumed on the premises,” this is a fee simple determinable. Use of drugs is called the “limitation event” that causes the defeasible fee to forfeit automatically, and the property automatically vests in the grantor (or the grantor’s successors) through the possibility of reverter. Durational language such as “as long as,” “so long as,” while,” or “during” is characteristic of the fee simple determinable and its automatic ending feature.
What if the defeasible fee followed by a future interest in the grantor is not automatic? Here the defeasible fee is called a fee simple subject to a condition subsequent. The corresponding future interest is a right of entry (also sometimes called a power of termination). The future interest holder (the grantor or the grantor’s successor) must take some action to cause the defeasible fee to forfeit. If the holder of the right of entry takes no action, then the fee simple subject to a condition subsequent goes along as before. So if O grants Blackacre “to A, but if drugs are consumed on the premises then O has the right of entry,” A has a defeasible fee called a fee simple subject to a condition subsequent. The language “but if,” “on condition that,” “provided that,” “provided however,” and “if” are all ways of expressing the condition. If the condition is fulfilled, here if drugs are consumed, then O, pursuant to the right of entry, must use self-help or a lawsuit to get A out in order to secure the forfeiture.
Now consider the situation where the grantor sets up a defeasible fee but follows it with an interest in someone other than the grantor, that is, some third party. Here there is one complex of interests, the fee simple subject to an executory limitation. The corresponding future interest is an executory interest. So if O grants Blackacre “to A as long as drugs are not consumed, then to B,” A has a fee simple subject to an executory limitation and B has an executory interest. This future interest is taken to be automatic; although there is a dearth of authority on the matter, there does not seem to be a future interest in a third party that is nonautomatic (along the lines of the fee simple subject to a condition subsequent). This may seem like an odd gap, but mostly it does not matter, especially because the same result could be accomplished by creating a fee simple subject to a condition subsequent and a right of entry in the grantor and transferring the right of entry to a third party—the labels and rules do not change.
The only other set of paired interests you may encounter (if only in works of historical fiction) is the fee tail. This was created by statute in the thirteenth century as a way of keeping land within a particular family for as long as the family dynasty lasted. It was created by granting land “to A and the heirs of his (or her) body.” The present interest, called a fee tail or an estate in tail, was similar to a life estate in that it lasted for the life of the first generation of offspring of the grantor (typically the eldest male). This was followed automatically by a life estate in the (eldest male in the) next generation, and then by a life estate in the third generation, and so on, until the family line fizzled out, at which point there was a reversion to the grantor (and the grantor’s successors). The fee tail was problematic because it tied up land for a very long period of time, making transfers of property and mortgaging property difficult. It was abolished long ago in England and in virtually every state in the United States. Different states follow different rules about what happens if some poorly advised person tries to convey land “to A and the heirs of his (or her) body.”
One last detail remains. Sometimes a grantor will want to create a future interest that cuts off a preceding interest before its natural end. The future interest in such situations is called an executory interest (we have already seen an example of this in the paired future interest to a fee simple subject to an executory limitation). An example would be where O grants “to A for life, but if A remarries, then to B in fee simple.” As long as such a scheme is designed for the support of A before remarriage and not as a penalty for remarriage, the executory interest in B cuts off A’s life estate upon A’s remarriage, before the natural ending of the life estate, which would otherwise occur on A’s death. Executory interests, like contingent remainders, are subject to the RAP. That is, they must vest in interest within the period prescribed by the Rule or they are invalid. Again, the proliferation of terminology is less important now than it used to be when remainders and executory interests behaved more differently than they now do. Both are transferable, devisable, and inheritable, and holders of both can sue for waste.
What distinguishes future interests such as reversions, remainders, or executory interests from a future sale or gift from A to B is that the holder of a future interest is regarded as having a property right now, namely a right to the asset in the future. So with every future interest you need to know several things. First, when will it become possessory—after the end of the present holder’s life or after some other defined event? Second, when it becomes possessory (when it “vests in possession”), what kind of right is it—full ownership or some lesser present possessory interest (like a life interest)? Third, is there some uncertainty about who the holder will be or whether the event will occur that makes the interest come into force? This problem of “vesting in interest” is primarily important because of the RAP.
How the System WorksSo far the system of estates and future interests might look like an arbitrary jumble of labels. Although the system does have a certain amount of unnecessary detail, one might wonder why we don’t need even more types of interests, considering all the ways property rights might be usefully carved up along the temporal dimension. Further, the features that are reflected in the labels for the various interests do not seem to exhaust those needed to make the system work. Instead, a number of architectural aspects and maintenance doctrines help the system function.
First, it is useful to realize that the combinations of interests we just explored have a generative quality that simply memorizing them does not capture. The key point is that the different interests can be combined and repeated in different ways, just as phrases connected by connectors such as “and,” “or,” “that,” or “then” can be combined to make complex sentences. For example, what if the grantor wanted to give Blackacre to A for life and then to A’s child B for life and then to C? O could grant “to A for life, then to B for life, and then to C.” A has a life estate and C has a remainder, in fee simple—when it becomes possessory it will be a fee simple. What does B have? Because it follows a life estate and the interest is not in O (the grantor), B has a remainder. But it is not a remainder in fee simple as in our previous examples. Instead, if and when the remainder vests in possession it will be a life estate in B, so B currently has a remainder in life estate, followed in turn by a remainder in C in fee simple.
Other constructional principles help to eliminate uncertainties about the list of temporal divisions that has been created. One particularly interesting principle is the conservation of estates: All the estates granted plus those retained must add up to the fee simple, which, recall, has indefinite duration. So if O transfers O’s entire interest, then the total of the interests transferred from O must add up to a fee simple, just as the total of the interests received by the grantees must add up to a fee simple. Nothing is created out of thin air or goes up in smoke. Thus, in all the examples the final future interest must be in fee simple in order for all the pieces to add up to a fee simple. Otherwise, we might get to a situation in which an interest ended (say a final life estate) with no one to take, which is not supposed to happen. What if O grants “to A for life, then to B for life?” Is this a problem? No. As we noted above, in such a case there is an implied reversion in O, and now we can see why. The interests that O grants and retains must add up to what O had to begin with, which was a fee simple. In order for this to be true O must have retained a reversion in fee simple, despite not having said so. It simply follows from the way the system works, here through the conservation of estates.
When a fee simple is broken into smaller durational parts, there is a “conservation” problem in a different sense of the word. The holder of a present interest is less likely to want to conserve the resource than the future interest holder(s). The present holder, aware of not being entitled to the property forever, will favor more consumption and less preservation; the future interest holder will favor less consumption and more preservation. Neither will reflect the preferences of a fee simple owner, who would take into account all the benefits and costs of consumption versus preservation. Mainly the problem is constraining the excessive consumption and lack of investment of the present possessor because the present possessor is the one with control over the property now. Indeed the future interest holders may not even be fully determined yet (the vesting in interest problem again) making monitoring and negotiating on their part prohibitive.
This conflict between the present and the future interest holders gives rise to the action for waste and its associated doctrine. Under the law of waste, the present possessory interest holder may not unreasonably use the resource and must turn it over in substantially the same condition as he or she received it. Interestingly, this is a standard, tucked in the middle of a system that is largely built on rules. The problems that can arise between present possessory and future interest holders are just too multifarious to reduce to rules. Not paying taxes (and risking forfeiture) is a clear case of waste (called “permissive” waste). Excessive mining or cutting of trees would also be waste (“affirmative waste”). Rules of thumb have developed to evaluate such behavior based in part on custom and in part on rough and conservative guesses. For example, under the “open mines doctrine,” a present interest holder has the right to mine only from mines open at the beginning of the interest but not otherwise. Tearing down a usable building and replacing it with another more valuable and cost-effective building can also be waste (“ameliorative waste”),1 although most jurisdictions today would probably not impose liability for changes that enhance the economic value of property.
In theory, a good benchmark for evaluating the behavior of the present possessor would be to ask what the holder of a fee simple owner would do under the circumstances. In practice, such a standard would be quite unworkable for a court. Hence the use of rules of thumb and the bias toward conservation. Of course, an owner can leave instructions that would override the law of waste, for example, if the owner wanted the life tenant to have the right to mine land not currently being mined.
How dire the conflict between the present and future interest holders is depends in part on how long the present interest holder’s interest is likely to last. (Another factor would be how much the present interest holder cares about the future interest holder, e.g., as a younger relative or a friend.) If the present holder’s interest is set to last for a long time or, in the case of a defeasible fee, is not likely to come to an end, then the present holder’s incentives will not be all that different from a full owner’s and the doctrine of waste is less likely to be invoked. (It may also be that courts, realizing this, give more leeway to present interest holders whose interests are “larger” in this sense.) Related to this, the value of an interest depends not only on its length, but it also on how weighted it is to the present. A dollar now is worth more than a dollar a year from now because one would need to have less than a dollar now in order to have a dollar a year from now. (To figure out how much a future dollar is worth in present value terms one needs to use the appropriate discount rate, which is the product of the rate of expected inflation and the real interest rate.) Thus if you hold the remainder, it matters a lot whether the life tenant is 30 or 90 years old.
Another principle central to the estate system is the numerus clausus. This term, originally from civil law, refers to standardization in property law: Applied to the estate system, the numerus clausus mandates a fixed and closed set of forms of ownership, and owners and transactors are not allowed to add to this list. For example, stringent versions of the numerus clausus disallow new forms of inheritance (such as variants on the old fee tail to keep property in the family over generations) and novel types of leases such as a lease for the duration of the war or a lease for life.2 (On the allowed forms of leases, see Chapter 6.) One cannot create a timeshare in a watch, for example, Wednesday rights in a watch that would give all the rights of an owner on Wednesdays. (One can rent out a watch but this gives the lessee less than full ownership.) This standardization of property in the numerus clausus stands in contrast to contract law where, subject to doctrines such as consideration and the criteria for contract formation, facilitating individual customization is the name of the game.
What is the harm in allowing parties to customize their property rights? One effect of limiting the ways of dividing property may be to discourage division and thereby prevent excessive fragmentation. But as we have seen, the system of estates is characterized by its generativity (as illustrated by the repeated application of the life estate plus remainder split). What the numerus clausus does is prevent the proliferation of new types of property rights. Transactors and even courts are supposed to let the legislature take the lead in making major modifications to the list of approved forms of ownership. By reducing the number of types of property rights, the numerus clausus gives third parties, including courts, less to be on the lookout for.
This is a pervasive problem and stems from the in rem nature of property. Thus, if you create a property right in Wednesday-watches or a property right with a different remedy for trespass (150 percent damages on even numbered days and 50 percent damages on odd-numbered days), this increases the information costs for your contracting partners and successors. Such an idiosyncratic right will be less valuable to them, and they will pay less for such rights, so to this extent the costs of your preferences are internalized to you through the price you receive (compare Demsetz, Chapter 3). But your idiosyncratic tastes also raise the information costs for anyone considering whether to buy watches or land in general, as well as for those seeking to avoid violating property rights or to enforce them. These third parties now have more possibilities to investigate. Such third party costs are an externality created by your idiosyncrasy. By limiting your ability to create these kinds of oddball rights, these external costs of information gathering and processing are reduced. Other methods of reducing the third-party information costs involve trusts (see Chapter 6) and rules for registering interests, especially in land (see Chapter 7). Which combination of these information-cost-lowering devices is best is an empirical question. But recall that because the estate system itself is so flexible (from its generativity), limiting the forms of ownership has a minimal impact on the goals that can be served using the system.
Third-party information costs may also supply a reason for the law’s suspicion of restraints on alienation, which we encountered in Chapter 4. One might ask why putting even an extreme restraint on alienation is a problem. If one can refuse to alienate, why can’t one alienate with strings attached? And if (and it is an if) the cost of the restraint is reflected in the price one can charge for the asset, then there is no externality. But when we cast a wider glance at who might be affected, there is more cause for concern. Restraints on alienation can in effect create new ways of owning in a fashion reminiscent of what the numerus clausus prevents. Restraints on alienation can make the nature of property rights in general harder to investigate and make the property system as a whole operate less smoothly in the realm of transfer. Without these systemic effects, the rule against unreasonable restraints on alienation has to be justified by parties’ myopia or other irrationality, or courts’ superior knowledge of what is reasonable ex post.
Because property interests can last a long time, any form other than the fee simple can lead to restrictions that persist far into the future. One concern is that remote future interests will either prevent alienation altogether (because the identity of future interest holders cannot be determined until certain contingencies are resolved), or will practically impair alienation (because of the difficulty of obtaining unanimous consent from all interest holders). Another concern involves “dead hand control”—tying up the use of property for long periods of time based on the preferences and assumptions of someone who has long since departed from the scene. Here too there is a widely shared intuition that an owner should not be allowed to project his or her control “too far” into the future. Worries about such control center on the proper relation between the present and the future, implying that the increasingly small benefits and costs, in present value terms, of the restrictions in more and more remote future times should be of less concern to current owners.
One device traditionally used to limit dead hand control is the (in)famous Rule Against Perpetuities (RAP). Originally the common law provided a loose set of doctrines that would invalidate restrictions placed by owners that operate too far into the future (“perpetuities”). The common law rule crystallized into its modern form (before more recent reforms and trends to abolish it) in part through the famous formulation by John Chipman Gray: “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.”3 Gray envisioned a rule that would have limited but highly determinate—and “remorseless”—effect. Violation of the rule would result in mechanical invalidation of the interest in question. Like the system of estates and future interests more generally, the rule could be applied ex ante, by a trained lawyer, so as to determine whether any interest is valid or invalid at the moment of its creation.
When does an interest violate the rule? The first thing to notice about the rule is what it is not. It is not a rule against interests lasting too long (the fee simple lasts indefinitely long) nor a requirement that the interest must become possessory at some specific time. Instead the rule requires that uncertainties surrounding interests that have not yet vested must be resolved, one way or another, within a period of time defined by the rule. The type of vesting that must occur, if at all, within the perpetuities period is vesting in interest, which, in the case of executory interests and options amounts to needing to know when they will vest in possession. Thus if the interest is conditioned on someone’s passing the bar or being born as the child of a certain person, these events have to occur within the “perpetuities period.”
Consider an example. If O grants “to A for life, then to the first child of A who passes the bar,” there is uncertainty as to who that will be. For the remainder to vest in interest, A must have a child who passes the bar. The issue under the RAP is whether that uncertainty will be dispelled within 21 years after some life in being at the creation of the interest. This means that we should be able to find one or more persons, who are living at the time the interest is created, such that the interest will vest (in interest) during that life or within 21 years after that person dies. If we can find no such “measuring life,” the interest is invalid under the RAP. In the example just given, A is the best candidate measuring life. Does A work? A is alive at the creation of the interest; but A could die, and A’s child (if any) might pass the bar more than 21 years after that. So the RAP invalidates the interest. By contrast, if O had granted “to A for life, and then to A’s first child who shall graduate from high school by age 21,” the interest would be good. We will know the identity of all of A’s children by the time A dies, and we will know within 21 years thereafter whether any child has graduated from high school by age 21. (If the child were in utero at A’s death, the remaining term of the pregnancy is added in to the perpetuities period as long as the child is born alive. Statutes govern the effects of more recent innovations having to do with in vitro fertilization technology.)
Well-advised clients should have no problems with the RAP.4 Besides being predictable to those in the know, one can also use a perpetuities savings clause to contain any problems. Such a clause in a will would state that if any interest in the will is challenged as violating the RAP, a corporate donee is designated to appoint a grantee that would most closely approximate the wishes expressed in the will. Some legislatures and courts have adopted a lenient approach to the RAP under which the courts are directed to clean up interests to make them conform to the RAP (for example, by changing 25 years to 21 years in an interest such as the high school graduation example above).5
Other states have pursued more far-reaching reforms. Some have adopted wait-and-see statutes, which do not invalidate an interest ex ante (as would the common-law RAP), but only if it turns out ex post that the interest does not vest within the perpetuities period. This eliminates some cases of unfairness (caused by bad lawyering?), but at the expense of creating considerable uncertainty while the waiting goes on. Sometimes wait-and-see reform statutes use a period of 90 years, or 90 years or the common law perpetuities period whichever comes earlier.6 Recently, in an effort to attract trust business, some states have moved to abolish the RAP altogether, especially for interests created in trust.7 Interestingly, advertisements in those states sometimes market the services of trust specialists on the ground that owners can now control the disposition of their property hundreds of years into the future. This puts the issue of dead hand control back in the spotlight.
RAP issues may seem to be of primary relevance to family wealth transmission and estate planning. But RAP issues can also arise in business settings. In some jurisdictions, notably New York and Pennsylvania, option contracts are subject to the RAP.8 Thus if one company grants another an option to purchase Blackacre (under which it has the right but not the obligation to purchase the property at a stated price) and any of the possible exercise times could occur more than 21 years later, there is trouble. Corporations cannot be measuring lives (their lives are indefinitely long), and so the RAP, in such jurisdictions, applies a 21-year time limit on options granted to corporations. Although options reduce the market price that the underlying property could fetch, options serve legitimate purposes of risk allocation and planning. Many have criticized the rationale for subjecting such options to the RAP at all, much less a 21-year one.
Co-OwnershipProperty rights can be split not only over time but can be shared at a given time. Co-ownership is used in a wide variety of situations where it is advantageous for multiple parties not just to share possession but to share the other incidents of ownership such as the financial flows associated with full ownership. Sometimes multiple uses and risk-spreading are the reasons to share ownership. These factors can be especially important in a long-term relationship such as marriage. Shared ownership can also be accomplished using various business entities such as partnerships and corporations. Co-ownership is simply the most basic method of sharing ownership, without resorting to the law of business organizations.
The notion of shared ownership is filtered through the common law “unities.” The most fundamental unity is the unity of possession. All the forms of co-ownership involve this unity, under which the co-owners each have an equal right to possess the whole. This does not mean that each co-owner must possess the whole to maintain ownership. The unity of possession only requires that each co-owner have a right to possess the whole. In other words, each co-owner is a gatekeeper over the resource with respect to all nonowners. The common law form of co-ownership that relies only on the unity of possession is the tenancy in common. Of course in most physical resources, more than one person cannot possess the whole (or even significant parts) at the very same time, so the co-owners will need to work out among themselves who will have actual possession of what. If they cannot agree, and one co-owner prevents the other from taking possession, there is an ouster.
Generally, co-tenants are not liable to each other for their use of the property. By the unity of possession each has a right to possess the whole. Only when one co-tenant ousts another does the co-tenant in possession become liable to the other for rent (“mesne profits”). An ouster in most jurisdictions requires more than an expression of intent to possess by the nonpossessing co-tenant and a refusal by the possessing co-tenant; usually some attempt to go into possession that is foiled by the co-tenant in possession is required. Co-tenants are liable to each other for rents received from third parties, and one co-tenant can sue another for contribution for proportionate expenses for upkeep and taxes. Otherwise courts are reluctant to enforce monetary obligations between tenants, such as for improvements, but will do so in the course of a partition. Also, even though a co-tenant may not be liable (absent ouster) for the co-tenant’s own use, the value of the use may be taken into account (as a set-off) when the tenant in possession sues a nonpossessing co-tenant for contribution to expenses, such as taxes and mortgage payments. In general, courts prefer not to measure values during the relationship but will take a more comprehensive view if the co-ownership relationship is ending, or the matter is in court on other grounds.
Another form of co-ownership is the joint tenancy, which is like the tenancy in common with the added feature of the right of survivorship. Like the gift causa mortis, mentioned in Chapter 4, the joint tenancy functions as a will substitute. Thus if A and B own in a joint tenancy, and one of them dies, the survivor winds up with sole ownership. It is important to realize that the theory is that the interest of the decedent simply disappears, leaving the survivor with the sole interest; nothing passes, in contrast to the situation in which one tenant in common dies with a will naming the other tenant as devisee (a devisee is the recipient of real property under a will). So if O grants “to A and B as joint tenants with right of survivorship and not as tenants in common,” A and B would be joint tenants. To create a joint tenancy, additional unities—besides the unity of possession—are required. First is the unity of time, which means that the interests of both joint tenants must begin at the same time. Second is the unity of title, under which both the joint tenants must have received their interests by the same instrument (or act of adverse possession), not by intestacy or other operation of law. Third is the unity of interest, according to which the joint tenants must have identical interests in terms of duration and the basic package of rights. It does not require their shares to be equal: A tenancy in common or a joint tenancy can be set up in which one co-owner can be entitled to more than an equal fractional share of proceeds from the asset (e.g., two co-tenants sharing sixty-forty).
The only difference between the joint tenancy and the tenancy in common is the right of survivorship. Only co-owners with a very close relationship, usually married couples, those in a long-term relationship, or close relatives would consider entering a joint tenancy. For married couples, joint tenancy for the family home is quite common, and in some jurisdictions is the default option. (For nonmarried co-owners, the default is the tenancy in common.) With respect to any other issue, the tenancy in common and the joint tenancy are exactly the same. So in either co-tenancy each co-owner has most of the rights of ownership: Each can exclude or admit strangers to the property, each can use property for enjoyment or profit, and each can sell his or her interest to a stranger.
The right of survivorship can be eliminated by “severing” the joint tenancy, leaving the joint tenants as tenants in common. To sever a joint tenancy one of the unities of special relevance to the joint tenancy—time, title, or interest—must be destroyed. If one joint tenant conveys to a third party, this destroys the unities of time and title and severs the joint tenancy. So if A and B are joint tenants, and A conveys to C, then B and C wind up being tenants in common. One common maneuver was for A to convey to C, and C to convey right back to A, where C would be considered a “strawman” or “straw.” These days many courts will consider the joint tenancy severed if one conveys to oneself as tenant in common.9 Courts are more divided over whether other actions, such as leasing, sever the joint tenancy.10 Of particular interest are the questions of whether a mortgage by one of the joint tenants severs the joint tenancy, and what effect the death of either one of the joint tenants has on the mortgage.11 Under the older “title theory” of mortgages, the mortgage took the form of a deed, and the conveyance would sever the joint tenancy, leaving the co-owners as tenants in common. Thus if either died, there would be no right of survivorship, and the mortgage would remain on the mortgaging tenant’s interest. Under the newer lien theory of mortgages, the mortgage does not sever the joint tenancy. According to the theory of the joint tenancy, the lien should probably disappear on the death of the mortgaging co-owner, but some courts hold that it survives as a lien on half the property. (Relatedly, courts are divided on whether the death of the nonmortgaging co-owner allows the lien to attach to the entire property.)
Severance simply turns a joint tenancy into a tenancy in common, but sometimes co-owners in either arrangement would like to cease being co-owners altogether. If so, they can agree that one will sell his or her interest to the other, or both will sell to a third party and split the proceeds. Failing that, the parties can petition a court for a partition, which is a court order dissolving the co-ownership. Partition is the ultimate form of no-fault divorce; courts will grant partition at the request of either owner, without requiring any justification. Partition can be in kind or by sale. Courts and statutes usually state a preference for in kind partition, which preserves some subjective value for those resources that can be physically split, over partition by sale, which often involves a court in more valuation issues. Nevertheless, there has been a trend toward partition by sale, perhaps because in the case of personal property and urban land, parcels are not as easy to split into viable parts, as was the case with tracts of farm land in an earlier era.
Some states have an additional form of co-ownership, reserved for married couples: the tenancy by the entirety. We will return to marital interests below, but the tenancy by the entirety is like the joint tenancy, in that it includes a right of survivorship, but unlike the joint tenancy, the tenancy by the entirety cannot be unilaterally severed. To destroy the tenancy by the entirety, the co-owners must get divorced, or convey the property to themselves (possibly by way of an intermediate “straw” transactor). For the tenancy by the entirety to be created, all the unities for the joint tenancy are required (time, title, interest, possession) plus the unity of marriage. Jurisdictions vary, but the tenancy by the entirety provides if anything a greater protection against creditors than the joint tenancy. Competing policies of protecting spouses and tort victims come into sharp conflict where one spouse commits a tort and the issue is whether the tort victim can reach the entire marital asset.12
Marital InterestsSpecial forms of ownership, such as the tenancy by the entirety, are only the beginning of the special law of marital property, which intersects with family law. Married co-owners are treated like other co-owners during the period of co-ownership, and married co-owners can seek partition or severance of a joint tenancy into a tenancy in common, just like any other co-owners. Property law supplies special rules for married couples on death and divorce. These rules for death and divorce can be modified by prenuptial agreements.
Somewhat controversially, courts are reluctant to supervise the behavior of couples during marriage, adopting a “love it or leave it” approach. This can be because the marriage is a multiplex relationship that is difficult to evaluate from the outside as long as disputes remain in the routine range. (Of course, when there is violence and when couples seek separation or divorce, intervention is called for.) Or it can be an echo of an earlier approach in the common law to defer to the husband’s decision-making during the marriage. At common law (but not in equity), the married couple were considered one entity or unified actor. The nineteenth century saw the passage of the Married Women’s Property Acts in all the states, which for the first time allowed married women to act as owners at common law during marriage.
The Married Women’s Property Acts and related reforms also changed the implications of marital property law on death. Originally, on the death of the husband, the wife was entitled to dower, which gave her a life estate in one-third of the husband’s real property, regardless of what the will provided for. When the wife predeceased the husband, he would have a right to curtesy, which gave him a life estate in all the real property held by the wife (legally or equitably), again potentially overriding a will that provided for less. Dower and curtesy have now been abolished in all states and replaced with the spousal elective share. This usually gives the surviving spouse the right to elect to take one-third of the deceased spouse’s estate, regardless of what the will says. So if A and B are married, and A dies leaving B $1 out of a $300,000 estate, B can elect to take $100,000.
Aside from the forced share, the other major property issue for married couples is the division of martial property on divorce. Here states can be divided into common law and community property states. Community property is a regime that automatically applies to married couples in certain states, mostly in the West and Southwest, that have Spanish or French law in their backgrounds. Property acquired during the marriage is presumed to be community property, which means that it is subject to fifty-fifty division on divorce. Property belonging to the spouses before the marriage and, in some states, bequests are presumed to be separate but can lose that status if the separate property is sufficiently commingled with martial assets. Property can also be transmuted from separate to community or vice versa by written agreement, but again the presumption is for community property.
Marital property in common law states is subject to equitable division on divorce. Ever since the move to no-fault divorce starting around 1970, fault does not play an official role in property division on divorce. Instead, property division is supposed to reflect a wide variety of contextual factors relating to needs, expectations, and contributions, and is usually but not always limited to the property accumulated by the parties during the marriage. Less emphasis is now put on alimony, which was meant to provide a source of income support for a dependent spouse, traditionally the wife.
The distinction between the community property and common law systems of division on divorce presents yet another example of rules versus standards. Community property uses a rule (the fifty-fifty split) with lots of further rules about what counts and does not count as community property. The modern common law approach is the quintessential standard—fair and equitable division based on all the circumstances. It is difficult to know which approach works better and what the criteria would be for deciding what “better” means in this context. An interesting empirical question would be whether the community property rule, being more predictable, facilitates reaching property settlements upon divorce.
Particularly difficult issues in asset division on divorce surround human capital, which often is the largest asset of the spouses. What if the main economic value generated by a marriage is in the form of human capital in one of the spouses? Some statutes and court decisions call for some valuation of professional degrees and career enhancements, but these decisions are all over the lot.13 Administration is not easy because the valuation must occur based on the average person in the spouse’s field (which may be ambiguous, e.g., physician or surgeon), but the degree-holding spouse’s career may work out better or worse than that. A prospective surgeon might break a hand or turn out to lack talent and have to enter a lower-paying specialty. If the court makes the award contingent on the future (by retaining jurisdiction), then the paying spouse may have an incentive not to work hard or to choose a lower-paying but possibly more satisfying occupation or spending time with family instead.14 What if a doctor claims to prefer a career of writing poetry? If the award is lump sum, what should be the measure? Is it one-half the value of the enhancement of the spouse’s earnings created by the degree (discounted to present value), or should it be the sacrifices of the nondegree spouse plus a reasonable rate of return? How should value attributable to native talent be treated? What risks do spouses take on entering the marriage in order to gain the surplus from marriage, and how do we wind them up when that surplus is largely gone?
Some commentators analogize the splitting of assets on divorce to the winding up of a partnership. Is marriage a partnership, and if so, what are the implications for asset division? Or does seeing the marriage as at least in part an economic partnership commodify marriage (see Chapter 3)?
Finally, a problem on the borderland between property and contract is the question of contracting among nonmarried people as a potential substitute for marriage. When such arrangements are wound up, should the courts enforce the parties’ understanding, to the extent that can be ascertained?15 Or should such couples be denied access to contract law, to channel them into marriage? Recently, the issue has been whether to extend marriage to gay couples, and if so, to what extent marriage itself should be customizable. Marriage has a third-party aspect in that others must respect the relationship and its associated decision-making powers. Emergency medical personnel cannot be expected to figure out an idiosyncratic marriage substitute or customized marriage with respect to medical decision-making authority. Such issues are compounded when the question turns to plural marriage. Marriage has both customized contract and mandatory property-like aspects, and the right mix of them raises many empirical and normative questions.
Further ReadingTHOMAS F. BERGIN & Paul G. HASKELL, PREFACE TO ESTATES IN LAND AND FUTURE INTERESTS (2d ed. 1984) (standard reference work).
Jesse Dukeminer, A Modern Guide to Perpetuities, 74 CAL. L. REV. 1867 (1986) (surveying various aspects of the Rule Against Perpetuities and related doctrines).
T. P. Gallanis, The Future of Future Interests, 60 WASH. & LEE L. REV. (2003) (proposing reforms for the estate system).
Thomas W. Merrill & Henry E. Smith, Optimal Standardization in the Law of Property: The Numerus Clausus Principle, 110 YALE L.J. 1 (2000) (developing theory of the numerus clausus based on information costs).
Elizabeth S. Scott & Robert E. Scott, Marriage as Relational Contract, 84 VA. L. REV. 1225 (1998) (analyzing marriage as in part an extralegal commitment that intersects with legal enforcement of property and other arrangements).
1. Brokaw v. Fairchild, 135 Misc. 70, 237 N.Y.S. 6 (S. Ct. N.Y. Cty. 1929).
2. See, e.g., Johnson v. Whiton, 34 N.E. 542 (Mass. 1893) (Holmes, J.) (disallowing new form of inheritance); Nat’l Bellas Hess v. Kalis, 191 F.2d 739 (8th Cir. 1951) (disallowing a lease for the duration of the war). For a lenient approach to the lease for life, see Garner v. Gerrish, 473 N.E.2d 223 (N.Y. 1984).
3. JOHN CHIPMAN GRAY, RULE AGAINST PERPETUITIES § 201 (Roland Gray ed., 4th ed. 1942).
4. But cf. Lucas v. Hamm, 364 P.2d 685, 690–91 (Cal. 1961) (ruling that the RAP is so difficult that a lawyer drafting a trust interest that was invalid under RAP was not liable in negligence or breach of contract). For fictional examples of RAP problems (and the like) run wild, see, e.g., Louis Auchincloss, The Power of Appointment, in POWERS OF ATTORNEY 172 (1963); BODY HEAT (Warner Bros. 1981).
5. See, e.g., In re Estate of Anderson, 541 So.2d 423 (Miss. 1989).
6. See UNIFORM STATUTORY RULE AGAINST PERPETUITIES, 8B U.L.A. 223 (2001), now included in the Uniform Probate Code, UNIFORM. PROBATE CODE §§ 2–901 to –906, 8 U.L.A. 61–62 (Supp. 2006).
7. Max Schanzenbach & Robert Sitkoff, Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes, 115 Yale L.J. 356 (2005).
8. See, e.g., Symphony Space, Inc. v. Pergola Properties, Inc., 669 N.E.2d 799 (N.Y. 1996); Central Delaware County Auth. v. Greyhound Corp., 588 A.2d 485 (Pa. 1991).
9. See Riddle v. Harmon, 162 Cal. Rptr. 530 (Cal. Ct. App. 1980).
10. Compare Tenhet v. Boswell, 554 P.2d 330 (Cal. 1976) with Alexander v. Boyer, 253 A.2d 359 (Md. 1969).
11. See, e.g., Harms v. Sprague, 473 N.E.2d 930 (Ill. 1984) (adopting the lien theory of mortgages and holding that mortgage did not sever joint tenancy and disappeared on the death of the mortgaging joint tenant).
12. See United States v. Craft, 535 U.S. 274 (2002) (discussing Michigan law but declining to insulate assets held in tenancy by the entirety from claims for federal taxes owed by one spouse).
13. See, e.g., In re Marriage of Olar, 747 P.2d 676 (Colo. 1987) (en banc) (holding degree not to be martial property subject to division but unfairness from sacrifice of career should be considered in maintenance award); O’Brien v. O’Brien, 489 N.E.2d 712 (N.Y. 1985) (degree is property subject to division under statute).
14. See, e.g., Gastineau v. Gastineau, 573 N.Y.S.2d 819 (Sup. Ct., N.Y. Co. 1991) (holding that professional football player wasted marital asset in walking away from professional football contract).
15. Marvin v. Marvin, 557 P.2d 106 (Cal. 1976) (in bank).
