An often overlooked but powerful technique for buying and selling property lies in the sale or purchase of Estates for Term and Remainder Estates. This can create real value when sophisticated people sit down to make a deal. The buyer buys a property, paying today, but receiving title only after an agreed upon interval has expired. Or he might buy it for a set number of years, only to have it revert to another party at the expiration of the term of ownership. Both buyer and seller can benefit from this type of transaction, depending upon their particular situation.
This is what buying a Remainder Estate in real estate amounts to. The seller, who would retain an Estate for Term – usually for life, but often for a stated period of time, is not deprived of the use, control, occupancy or possession of the premises. He is paid in advance for the Remainder Estate, which is a deeded future interest in the property. The buyer simply waits out the term and the entire property reverts to him at the expiration of the seller's Estate for Term.
So long as a lender or buyer can be found, either party can mortgage or sell his particular Estate to anyone else at any time; but the other party's title interests would supersede any subsequent transaction. When it comes to enforcement of liens against the property, this creates an interesting set of circumstances. Let's look at this from the standpoint of first the seller, then the buyer.
Suppose a judgment creditor arrives on the scene prepared to have an Estate for Term in a property sold to satisfy the lien. Because the lien would only attach to the Estate for Term, only that interest in the property would be sold. Most foreclosure specialists wouldn't bid, and couldn't bid to buy partial ownership in real estate that would expire at some future point because few lenders would finance such an acquisition. Now, what about the Remainder Estate holder?
Liens don't attach to future interests in property, and a Remainder Estate is essentially a future interest. If the investor had the foresight to have his interests held in Trust, they'd be virtually impregnable. Furthermore, because they wouldn't be producing income, the Trust would have no taxable income to report.
Those holding Estates for Term have a fiduciary obligation to those holding a Remainder Interest. Thus, should they be remiss in paying taxes on time, maintaining adequate insurance, making mortgage payments, completing repairs, etc., they'd be answerable to the holder of the Remainder Interest. He'd be a lot less reluctant to foreclose on a lien on an Estate for Term when he held the Remainder.
With the advent of the 1997 tax law and its effects on long term capital gain taxes, leaving property to heirs via a bequest may not be as potent a strategy as making lifetime gifts to them. If the Beneficiaries of a Trust that held a Remainder Estate included the investors heirs, the combination of discounts for future interests and non-controlling interests in a Trust would enable the investor to pass on significant assets without incurring a gift tax. Because the basis of gifted property in the hands of the donee would be the same low basis as in the hands of the donor, there would be no step-up in basis. Upon sale, 20% maximum capital gains taxes would be due and payable. On the other hand, if they inherited same property, it might escape capital gains taxes, but could incur estate taxes that would be taxed at 55% maximum rates.
To satisfy all the needs of the various parties, a negotiated transaction can be as simple as an exchange of property for cash or unimaginably complex. By taking full advantage of negotiating tools and techniques, sellers can realize greater after-tax benefits and buyers can acquire properties that suit them both.
