A Remainder Estate is one of the title interests in real estate. It is usually conveyed by deed, and as such, is a future interest in title that is much stronger than an Option because it survives the death of an owner and divides a property in such a way that judgment liens become very difficult to levy. Here's why:
Suppose you wanted to raise money, yet didn't want to move out of your house. On the other hand, I might want to invest in your house, but wanted to pay a low price and hold it for appreciation without having to manage it. I'd pay you for a Remainder Estate which would revert to a Fee Simple Estate upon your death, or after a specified number of years. This purchase should qualify under IRC Section 121 as a tax free sale of your residence. You would retain a Life Estate or an Estate for Years which would terminate either at your death, or when your Estate for Years terminated. You would have all the privileges and obligations of ownership. You'd make all the mortgage, insurance, property tax, and association payments and keep the property maintained because you would have a fiduciary with the Remainder Estate holder (me) to do that.
One of my mentors found a marvelous way to buy Remainder Estates from elderly people who were being driven from their free and clear homes by the rising costs of taxes, insurance, and upkeep. That is happening to an alarming degree today particularly in Florida where people are leaving the State because of these rising costs. Here's what he would do:
He'd find a person who needed money but didn't want to move and get them to do three things. First, they'd contact their insurance agent and find out their life expectancy according to his actuary tables.
Second, they called their banker and asked how much the interest rate would be on a loan on their home, and what the payments would be. Finally, they called an appraiser and found out the current fair market value of their home. With these numbers, the appraised fair market value of their home was discounted by the interest rate provided by their banker over the term of years provided by their insurance agent to arrive at the fair market discounted value at the date of their death. This was the figure paid by my mentor for a Remainder Interest in their house. Let's look at the numbers:
Suppose the FMV of the house were $500,000. Let's say the interest rate was 7% and their remaining years of life was 20 years. Plan A would be for him to agree to pay them $129,220 today for a Remainder Interest in their house. This gave them enough money to
continue to live in their home. Of course, they might have been just as willing to carry back the financing for an annual payment of $12,191 over the twenty years. If they died in the meantime, title to the house would revert to him, but he'd still continue to pay their estate until the loan was paid in full.
Plan B would be for him to approach a passive investor such as a Roth IRA and offer half of a $500,000 house for $130,000 and lease it back for 20 years with a guaranteed break even cash flow after all taxes, insurance, operating expenses, and maintenance. If the
house appreciated at 3% per year, at the end of 20 years the investor would have an asset worth about $450,000. So would you.
Is this worth doing?
