A few weeks ago, I wrote about the pitfalls elderly Americans face when bequeathing their property to their children (or grandchildren). One option I didn’t discuss was what the law calls “remainder interests,” which are a class of “future interests.” Both of these terms relate to mechanisms of transferring (almost always) real estate.
A remainder interest means, as it sounds, a leftover property right that comes into being in the future provided certain conditions occur. A landowner signs a deed that transfers property to another, usually a “life estate,” with the caveat that it be transferred on that person’s death to a third party. In practice it often means the landowner deeds himself or herself a life estate and gives the remainder interest to a child. As with any other bequest discussed in my earlier post on gifts from wealthy parents, it can both lead to ways of avoiding probate (since the property automatically transfers to the third party by virtue of the deed) and situations in which the recipient of the remainder interest creates problems for the holder of the life estate.
Indeed, a trustee will see the remainder interest as an asset should the holder of it file bankruptcy. But can a debtor use exemptions to shield that remainder interest from the trustee?
It’s an interesting question that’s been raised in at least one New York bankruptcy. The holders of the remainder interest, who were living with their mother who owned the life estate, filed chapter 7 and tried to cover it with the state’s homestead exemption. The trustee objected, arguing that the debtors didn’t “own” the remainder interest as contemplated by New York law. (The trustee didn’t dispute the debtors’ residence in the mother’s life estate, nor the $600 monthly rent they paid to her.)
The bankruptcy court held that the remainder interest, though a future interest, is the same as any other property interest, the only difference being that possession occurs at a future date. What mattered was the right as it stood at the time of filing. Consequently, the debtors could claim the homestead exemption to protect their future right. On appeal, a federal district court sustained the bankruptcy court’s decision.
The opinion of the bankruptcy court can be here (pdf).
Remainder interests can work to help owners keep property out of probate, but in the bankruptcy context, as in the case discussed above, it’s crucial that the debtor live on the premises. It didn’t come up in the case, but it also helped that the debtors were paying the life-estate holder for the privilege of living there.
Complex property arrangements can complicate a bankruptcy, so it’s important to hire an experienced New York bankruptcy lawyer to handle your case.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy law changes Bruce Weiner for a free initial consultation.