Remainder Interest Definition

A remainder interest is a fractional ownership in an asset or property left over after another party received a full license. In most cases, the remainder holder received the right to receive the future income generated by the asset or property and the right to own the asset or property eventually.

Remainder Interest Examples

One example of a remainder interest would be when an individual purchases a property and then sells the property to another individual, understanding that the first individual will retain an interest in the property. This remainder interest would entitle the first individual to continued use of the property and any income it generates until they die. Upon their death, the second individual would then become the complete owner of the property.

Another example of a this interest would be when an individual purchases an asset, such as a share of stock, and then sells that stock to another individual, understanding that the first individual will retain a remainder interest in the stock. This interest would entitle the first individual to continued ownership of the stock and any dividends or other income it generates until they die. Upon their death, the second individual would then become the full owner of the stock.

How is Remainder Interest Calculated in a Trust?

When an individual sets up a trust, they can include a remainder interest. This interest will entitle the holder to continued use of the property or asset and any income it generates until they die. Upon their death, the trust will then distributes to the remainder of interest holders, who may be individuals or another entity such as a charity.

You can calculate the remainder interest in a trust by dividing the trust’s total value by the number of interest holders. This number will give each remainder holder a percentage of ownership in the trust. The holder of a remainder interest will then be entitled to receive any income generated by the trust and continued use of the property or asset held in the trust.

How is a Remainder Taxed?

The holder of a remainder interest will then be entitled to receive any income generated by the estate and continued use of any assets held in the estate. Like selling any property interest, an individual must pay income tax on the sale of the remainder.

Next Steps

Read more of the definitions our team at Valur prepared for you. Or calculate the income and tax deductions you could achieve from it with our online tools.

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