Executory Interests vs. Contingent Remainders

When most people think about property rights, they think about who currently owns the property. In estate planning, this is referred to as a present interest. However, present interests are only one-half of the equation when it comes to property ownership. Future interests are just as important, especially when creating a Florida estate plan. Understanding future interest is crucial to effectively implementing one’s wishes regarding how their property will be used after they pass on.

Defining a future interest in a property is a bit complex, but intuitively, they make sense with a bit of explanation. A future interest in an estate is a present interest in the property, but it does not allow the holder to currently possess the property. In other words, something usually needs to happen before a person with a future interest receives property.

There are several types of future interest. However, two of the most common are executory interests and contingent remainders.

What Is a Remainder Interest?

A remainder is a type of future interest in which the holder of the interest-only obtains possession of the property if and when the present ownership interest terminates. One of the basic elements of a remainder interest is that it must originate at the same time as the present interest, typically through the same deed. A remainder interest cannot belong to the original grantor, because such an interest would be a reversionary interest.

For example, assume Joe owns a piece of property. Joe wants to allow his best friend, Tom, to live on the property until Tom passes away – at which point, Joe wants the property to go to his daughter, Betsy. In this situation, Tom has a life estate and Betsy has a remainder interest. While Betsy’s interest is real and legitimate, it does not entitle her to the property until Tom passes away.

Remainder interests come in two flavors: vested and contingent. A vested remainder interest is one that is held by a specific, identifiable person and does not have any conditions attached. In other words, nothing can divest the holder of their eventual right to the property. In the example above, Betsy’s remainder interest is a vested remainder interest because she was identified by name, and there are no preconditions that must be met. Notably, an interest holder’s death does not constitute a precondition because, inevitably, the interest holder will pass on.

Contingent remainders are those remainder interests that either 1.) belong to someone who cannot be identified when the interest is conveyed, or 2.) are contingent upon something other than the termination of the prior estate. To use the above example, assume Joe changed his will to leave the property to Tom during his life, and then Betsy if she is unmarried. This gives Tom a life estate and Betsy a contingent remainder. In this example, Joe retains a reversionary interest, because the property will return to him (or his heirs) if Betsy is married at the time when Tom passes away.

What Is an Executory Interest?

Another important type of future interest is executory interest. An executory interest is similar to a remainder interest in that it too does not give the interest holder the present ability to possess the property. The easiest way to understand an executory interest is that it is any future interest that is not a remainder interest. However, executory interests are slightly different in that they can either terminate a present interest holder’s estate or commence after the current estate’s natural termination. Many use executory interests to grant property to a party with conditions upon their use.

There are two types of executory interests:

•   Springing executory interests: A springing executory interest will transfer ownership from the grantor to a third party. Another way of thinking about springing executory interests is that they cut off the grantor’s own interest in the property.
•   Shifting executory interests: A shifting executory interest will transfer ownership from a grantee to a third party. Another way of thinking about shifting executory interests is that they cut off the grantee’s interest in the property.

Executory interests are notoriously complex, so a few examples may help highlight the differences.

•   “Joe transfers property to Tom for life, and then to Besty if she is at least 20 years old.” This creates a springing executory interest for Besty. The property transfers from Joe to Tom for Tom’s life. Then, when Tom dies, the property goes to Betsy, provided she is at least 20 years old at the time.
•   “Joe transfers property to Tom for life, but if Tom remarries, the property goes to Besty.” This creates a shifting executory interest for Betsy. The property transfers from Joe to Tom, provided Tom does not remarry. If he does, then the property goes to Betsy.

Future interests can be incredibly complicated. However, they are equally important to creating an effective Florida estate plan. Those with questions about the present and future property interests should reach out to a dedicated estate legal team for assistance.

Contact a Trusted Estate Legal Team Today

If you have questions about leaving property to a loved one, and the best way to do so, contact the Florida trust and estates legal team at Beller Law, P.L. Between the present and future interests, there is almost certainly a way to accomplish what you desire. At our Florida trust and estates law firm, we have over 30 years of experience helping clients with all their estate planning needs. From wills and trusts to powers of attorney and healthcare directives, our dedicated team of lawyer will work closely with you and your family to craft a customized estate plan to suit your unique needs. With our help, you can be confident that a plan is in place for whatever the future brings. To learn more, and to schedule, a consultation with one of our knowledgeable legal team, give us a call today. You can also reach us through our online form.