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Remainder interest transaction (RIT).

Considered an aggressive estate planning technique, the RIT has been used as a means of shifting the future appreciation of an asset from one individual to another. As with GRITs, the RIT falls squarely within the scope of the Chapter 14 special valuation rules (see Estate Freezes, pages 424-425, and Q 913, Tax Facts on Insurance & Employee Benefits (2010)). However, a special rule allows for market valuation of RITs involving tangible property with respect to which the non-exercise of rights under the term interest would not have a substantial effect on the valuation of the remainder interest (e.g., non-income producing property such as a painting or undeveloped real estate).

Remainder interest transactions have taken advantage of the fact that property interests can be divided between life estates (i.e., the right to the use of property for life) and remainder interests (i.e., the right to ownership of property once the life estate of another has terminated). To the extent they are still viable, a RIT for a term of years, rather than a life estate, would exclude the property from an estate provided death occurs after the end of the term of years.

Where still viable, it is important that the sales contract for a RIT involving the retention of a life estate require that the purchaser (the remainderperson) pay full and adequate consideration for the remainder interest (there is a split in the courts regarding whether adequate consideration should be measured by the remainder interest or by the value of the entire property). Without payment of full and adequate consideration, the IRS may treat the whole transaction as a gift with a retained life estate, with the result that the full date-of-death value of the property is included in the seller's estate.

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Title Annotation:Terms & Concepts
Publication:Field Guide to Estate, Employee, & Business Planning
Date:Jan 1, 2010
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