Our last article discussed the various methods available to identify the heirs of someone you’ve concluded (hopefully reasonably) is deceased. You may not have noticed, but we skipped right past the laws of intestate succession, or who inherits what, for three good reasons.
First, the laws of intestate succession are as dull as dishwater. Second, the law that determines who inherits what depends completely on when the person died. Third, and actually most importantly, all of the states discussed last month, with the exception of Kentucky, have a procedure that allows you to get a Court to tell you who inherits what, so why bother figuring it out for yourself.
This month is a discussion of life estates. Even though a life estate can be created by a deed, a will or even (and often) a trust instrument, it (the life estate) comes into existence under the least convenient circumstances when someone dies intestate.
Least convenient? Yes. Least convenient.
When a deed, will or trust instrument creates a life estate, it does so intentionally and usually gives some indication what the life tenant can and cannot do. When someone unexpectedly dies intestate, the life estate just springs into existence and has to be dealt with. That’s why it’s inconvenient.
So what is a life estate? Simply stated, it is an estate in land measured by the life of some person. If the measuring life is someone other than the life tenant, the estate is an estate “pur autre vie” which is literally “for another’s life” in French.
The life tenant is the party with ownership rights, the current right of possession and use of the property. The life tenant has the right to all of the rents, issues and profits generated by the property during their lifetime, but he or she holds the property in trust for the remaindermen, and must preserve the property in as good a condition as received.
The right of the life tenant to use and enjoy the property during the term of the life estate is called the usufruct. Any action by the life tenant that reduces the value of the property is called abusus. These terms aren’t that important, but if you get comfortable using them you will sound very smart.
Anyway, the remainderman or remaindermen are the party or parties who have ownership rights but do not have a current right of possession.
What does this have to do with oil and gas?
Quite a bit. The existence of a life estate has implication both in terms of leasing as well as payment of rents, bonuses and royalties.
From the leasing perspective, the life tenant (or its lessee) may not develop the minerals either personally or through a lessee without the joinder of the remainderman. Such action constitutes waste (abusus) that the future interest holder can stop by injunctive relief and which would entitle the future interest holder to the entire proceeds of development as a remedy.
If the mineral interest you want to lease is held by a life estate, do everything necessary to identify the life tenant and all of the remaindermen and lease all of them.
From the payment perspective, the primary question is: what part of any payment is income from the property and what part is payment for depletion of the property?
Generally speaking, any form of rent is income payable to the life tenant. Bonuses and royalties are a little more complicated. Strictly speaking, bonuses and royalties are payments for depletion of the property and thus are ultimately payable to the remaindermen. However, the life tenant is entitled to the income from those royalties. Consequently, in the absence of any other arrangement, bonuses and royalties should be invested and the income paid to the life tenant.
One extremely important point: all of these general rules are subject to any agreement among the parties to the contrary.
Lessons to be learned: when faced with a life estate, you should obtain an agreement among all of the parties stipulating how the bonus, rentals and royalties will be paid.