Future Interest

Definition of Future Interest

Future Interest in real estate refers to a legal right to property ownership or possession that will begin at a future date. Unlike present interests, where the holder has immediate rights, future interests become possessory in the future, often after the end of some existing estate or interest.

For example, a future interest may form part of complex estate planning, allowing individuals to outline how property will be distributed in the future.

Examples

Life Estate with Remainder: Suppose a property owner grants an individual a life estate, which allows the person to use the property for the duration of their life. Once the life estate terminates (upon the individual’s death), the property automatically transfers to another party (the remainderman). In this scenario, the remainderman holds a future interest.
Shared Appreciation Mortgage (SAM): When a lender offers a shared appreciation mortgage, they might not gain immediate benefits but have a vested future interest in the property’s appreciation. This instrument allows lenders to share in the property’s appreciated value upon sale or refinancing, after a specific period.

Frequently Asked Questions

Q1: Can a future interest be sold or transferred?

Yes, future interests can often be sold or transferred, though the specifics depend on the terms of the property deed and state laws.

Q2: What happens to a future interest if the initial holder passes away?

It will depend on the estate planning terms. Typically, the future interest will be governed by the deceased’s will or trust, or, if not specified, by state intestacy laws.

Q3: Are future interests subject to property taxes?

While the holder of a future interest generally does not pay property taxes, these taxes will be due once the interest becomes possessory.

Q4: Can a future interest be intentionally revoked?

In some cases, yes, but it requires changes to the original legal documents that created the future interest, sometimes involving court approval.

Q5: What is a vested vs. contingent future interest?

A vested future interest is assured to eventually become possessory. A contingent future interest depends on a condition being met or an event happening.

Life Estate: A property interest limited to the duration of an individual’s life. The life tenant has exclusive use of the property until death.
Remainder: The future interest left in a property, which takes effect after a life estate terminates.
Reversion: Future interest retained by the granter after a temporary estate is ceded to another party.
Executory Interest: A future interest that will be divested upon the occurrence of a specific event, not automatically at the end of a prior estate.
Contingent Interest: A future interest that only becomes possessory if certain conditions are met.

Online Resources

References

“Real Estate Principles” by Charles F. Floyd and Marcus T. Allen
“Fundamentals of Real Estate Investment” by Austin J. Jaffe and C. F. Sirmans

Suggested Books for Further Studies

“Wills, Trusts, and Estates” by Robert H. Sitkoff and Jesse Dukeminier
“Estates in Land and Future Interests: A Step-by-Step Guide” by Linda H. Edwards
“Principles of Real Estate Practice” by Stephen Mettling and David Cusic

Real Estate Basics: Future Interest Fundamentals Quiz

### Can future interests be immediately possessed and used? - [ ] Yes, future interests can be used right away. - [x] No, they are only activated at a future date. - [ ] They can sometimes be used immediately with permission. - [ ] Only the California and New York states allow this. > **Explanation:** Future interests are rights to possession or use of property that are only realized at a future time, following the lapse of a prior estate or condition. ### What is an example of a future interest that comes into possession after a life estate? - [ ] Leasehold interest - [x] Remainder - [ ] Fee simple absolute - [ ] Easement > **Explanation:** A remainder interest becomes possessory after the termination of a life estate, making it an example of future interest. ### Who typically holds the reversion interest in property? - [x] The original grantor or the granter's heirs - [ ] The current life tenant - [ ] A third-party remainderman - [ ] The local government > **Explanation:** A reversion is a future interest that remains with the original grantor or the grantor's heirs after they grant a temporary estate (like a life estate) to another party. ### What is a defining feature of a contingent future interest? - [ ] It automatically exists without condition. - [x] It relies on the occurrence of a specific event or meeting a condition. - [ ] It merges with present rights. - [ ] It's exempt from property taxation. > **Explanation:** A contingent future interest only becomes possessory if a specific event occurs or a condition is met, making it uncertain until the condition is fulfilled. ### When does the lender's future interest in a Shared Appreciation Mortgage become relevant? - [ ] Upon immediate repayment of the loan - [ ] Never, as it's irrelevant - [x] Upon sale or refinancing of the property - [ ] At the end of the property contract > **Explanation:** In a Shared Appreciation Mortgage, the lender's future interest becomes relevant upon the sale or refinancing of the property when the appreciation value is realized. ### Which of the following is NOT a future interest? - [x] Fee Simple Absolute - [ ] Remainder - [ ] Executory Interest - [ ] Reversion > **Explanation:** Fee simple absolute represents present full ownership rights and is not classified as a future interest. ### What conditions might affect a future interest's realization? - [ ] Length of existing leases - [x] Occurrence of particular events or non-occurrence - [ ] Local property ordinances - [ ] Financial status of the life tenant > **Explanation:** The realization of a future interest can be dependent on specific events stipulated in the property deed or agreement. ### Who holds the executory interest? - [ ] A remainderman - [x] Another third party until the triggering condition occurs - [ ] The holder of the life estate - [ ] The grantor without any conditions > **Explanation:** An executory interest is held by a third party until a specific condition occurs that divests the prior interest and grants possession to the executory interest holder. ### For what type of property planning is future interest most relevant? - [ ] Commercial leases - [ ] Immediate rental agreements - [x] Estate planning and wills - [ ] Short-term property flips > **Explanation:** Future interest is most relevant in estate planning and wills, where planning for the distribution of property interests upon specific future events is crucial. ### Why might a life estate be held to give another party a future interest? - [ ] To delay property tax payments - [x] To ensure orderly transfer of property rights after the life tenant dies - [ ] To increase property value immediately - [ ] Because it's legally mandated > **Explanation:** A life estate helps ensure orderly transfer of property rights following the life tenant's death, with the remainderman holding a future interest that becomes possessory thereafter.