Holding Title – How Do You Own Your Property? Estate in Remainder

This is the fifth in a series about how to hold title (own real estate). As I’ve said, the way you hold title affects how the ownership of a property can be transferred and how the property can be financed, improved, used as collateral or taxed. This week I’ll talk about an unusual form of holding title: an estate in remainder.

Remember, I am not an attorney or an accountant, and those are the experts to talk to about your financial and legal decisions (like how to hold title). I’m just here to spark a discussion.

An estate in remainder allows a grantor—often a parent—to transfer a portion of a property’s title while he or she is alive, with a guarantee that the owners of the remainder interest (ORIs)—usually the grantor’s children—will receive the whole title (full ownership of the property) when the grantor dies, even if the grantor no longer owns the property.

Stay with me. This is a quirky, but interesting arrangement. There are two sides to this type of agreement: the estate in remainder belongs to the ORIs and something called a “life estate” belongs to the grantor(s). The grantor enjoys the full rights and responsibilities of property ownership (a married couple can be joint grantors). Grantors can live in it, rent it, farm it, or even sell it, subject to the rights of the remainder estate. However, no matter what grantors do with it, when they die, that property belongs to the ORIs.

The arrangement is useful to those who want to reduce and/or delay inheritance tax. Here’s how: legally, parents are limited in the amount of money they can give to their children (or other individuals) each year without suffering inheritance tax. Specifically, each parent can give a maximum of about $11,000 to each child. So if you have two children, and you want to give them money, you and your spouse could each give them $11,000, totaling $22,000 per child. Now, if these are grown children who have married, each spouse can also give $11,000 to the daughter- or son-in-law.

With an estate in remainder, those same gifts can be applied to the ownership of the family property—the parents’ home. The first year, each married couple can be given $44,000 worth of the property. That same value in the real estate can be transferred the next year, and so on.

If an estate in remainder, then the house automatically goes to the ORIs upon the death of the parent, even if the house had been sold to someone else. Weird, but true. Clearly no one in their right mind would purchase a house, knowing that when the people who sold it to you die, you no longer own the home, right? Well, not so fast. The buyers wouldn’t pay full market value for the property, certainly, but they might purchase the home for a steeply discounted rate, taking into consideration how long the grantors (sellers) are likely to live. If the price is right, and the sellers are relatively young and healthy, it could be worthwhile.

Again, this column is intended to spark a discussion. It is hard to talk about death with your parents or your children, but now is the time—before mom and dad pass away or become mentally incompetent. Your family should decide how your estate is managed. If you don’t, the government will.

If you have questions about real estate or property management, please contact me at rselzer@selzerrealty.com or visit www.realtyworldselzer.com. If you have questions about how you should hold title, call your attorney and/or accountant.

Have suggestions about what I should write? Let me know. If I use your suggestion in a column, I’ll send you’re a $5.00 gift card to Schat’s Bakery. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 35 years.