A remainder interest is a future property right held by a person (the remainderman) that becomes possessory only after a prior estate—usually a life estate—terminates. Unlike the life tenant, the remainderman has no rights to occupy or control the property until that event occurs.
Including a remainder interest in a deed or trust ensures a clear line of succession without probate delays. Title reports will flag future interests, alerting lenders and insurers that full fee simple ownership won’t vest until the preceding estate ends.
A reversionary interest is a future interest the grantor retains when no remainder is created. Upon termination of the present estate, ownership “reverts” back to the original owner or their heirs.
| Remainder Interest | Reversionary Interest | |
|---|---|---|
| Holder | Third‐party beneficiary (remainderman) | Original grantor |
| Creation | Same instrument as present estate | Retained by grantor when no remainder named |
| Possession | After prior estate ends | After prior estate ends |
Example (remainder): “To Alice for life, then to Bob.” Bob holds the remainder. Example (reversion): “To Alice for life.” No remainder named, so on Alice’s death the property reverts to the grantor.
When drafting a life‐estate deed, include language such as “to Grantor for life, then to Beneficiary.” Specify whether the remainder is vested or contingent and define any conditions.
In CRTs, donors retain an income interest for life (or term of years) and name a charity as the remainder beneficiary. The trust document must clearly state distribution triggers.
Gifting transfers the remainder at its present‐value (triggering gift‐tax reporting), while selling requires a fair‐market‐value appraisal and may generate capital gains or ordinary income on the sale proceeds.
Record the deed or trust with the county recorder. Title insurers will note the future interest; closing agents should verify that life‐estate and remainder interests are reflected in the policy exceptions.
The remainderman is entitled to full possession once the life estate terminates. Until then, they have a vested interest enforceable in court.
Unless the deed specifies otherwise, the remainderman shares in property taxes, insurance premiums and major maintenance costs in proportion to their future interest—often after the life tenant’s death.
If a life tenant misuses the property or neglects maintenance, the remainderman can seek injunctive relief, partition or damages to protect their future interest.
Federal regulations use IRS §25.2702 tables to calculate the present‐value of remainder interests. The tables factor in the life tenant’s age and the applicable federal rate (AFR).
For a $500,000 property and a 70-year-old life tenant using a 3% AFR, the remainderman’s present‐value might be 25% ($125,000). This figure is reported on IRS Form 709 or on the decedent’s estate tax return.
Gifting a remainder interest triggers a taxable gift equal to its present‐value. Annual exclusions and lifetime exemptions apply, and Form 709 must be filed if the value exceeds the exclusion.
If the life tenant retains certain powers (e.g., right to substitute property), the remainder may be pulled back into their gross estate under IRC §2036 or §2038.
The remainderman’s basis is generally the donor’s original basis plus any gift‐tax paid attributable to appreciation. Holding period includes donor’s period.
A gifted remainder can be penalized under Medicaid’s five‐year look‐back. In some states, a life estate plus retained life use may preserve the home exemption for nursing‐home eligibility.
Older homeowners use life estates with remainder interests to pass property directly to heirs while retaining lifetime occupancy and avoiding probate.
Life estates can convert an exempt home into a partially countable asset, potentially preserving part of its value for heirs while satisfying Medicaid rules.
CRTs provide income and a tax deduction for donors, while private life estates benefit family members without ongoing trust administration fees.
Investors can acquire remainder interests at discounts, waiting for life tenants to pass. This “patience investing” offers unique ROI profiles.
Yes; you can sell or encumber your remainder interest, but lenders may be reluctant and buyers will demand a discount for the deferred possession risk.
Yes; a gifted remainder is a non‐exempt transfer if it occurs within Medicaid’s five‐year look‐back, potentially incurring a penalty period.
Disputes over maintenance, taxes or use can be resolved via negotiation, mediation or court actions such as partition or accounts of rents and profits.
Use the IRS §25.2702 actuarial tables in Publication 1457 and the mid‐term applicable federal rate (AFR) in effect for the month of the gift or valuation date.
Laura and George Smith wish to remain in their cottage but want to ensure it passes to their two children, Amy and Brian, without probate.
The Smiths execute a deed “to Laura for life, then to Amy and Brian as joint remaindermen.” This secures their occupancy and the children’s future ownership.
Using a 4% AFR and Laura’s age (75), the children’s combined remainder interest is valued at 30% of $400,000 ($120,000). The Smiths file Form 709 reporting a $120,000 gift.
Upon Laura’s death, title vests automatically in Amy and Brian. They record an affidavit of death of life tenant, update the deed, and obtain clear title subject only to any liens or taxes owed.
Always engage qualified estate-planning attorneys for drafting, certified appraisers for valuations, and tax professionals for gift, estate and Medicaid implications.
For sample clauses and deeper guidance, review state-specific deed precedents or charitable remainder trust templates in legal form libraries.
