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How to calculate the value of a remainder interest in bankruptcy

Occasionally we have to deal in bankruptcy with debtors who own a "remainder interest" in real estate. This can happen when the debtor's parents have engaged in Medicare planning and deed their home to their kids (typically), retaining a "life estate." This means the parents remain the legal owners of the property so long as they are alive, and, upon their passing, the children will become full owners of the property.

If one of the children who owns part of the future, or "remainder" interest in the property files bankruptcy, how would the asset be valued? The IRS deals with this issue all the time, in valuing for gift tax purposes the transfer today of a future interest in property. At least in the Bankruptcy Court in Rochester, trustees use the same calculation method as the IRS.

The IRS has a publication,, describing the methodology. To make the calculation you need three pieces of information. First you need a current appraisal or valuation of the property. Secondly, you need to know the age of the life estate owner or owners. Finally, you need the applicable interest rate.

Why the interest rate? The present value of a future interest is greater when interest rates are low, and less when they are high. The IRS uses "Section 7520" interest rates to make this calculation (for those interested, a definition of this rate is below.) This interest rate varies each month, so you need to go to this chart to get the current rate:,,id=112482,00.html

Next, you have to look up actuarial tables to, um, predict when the life estate will, um, terminate. There are two actuarial tables, one if the life estate owner is a single person and another if two people own the life estate. If a couple own the life estate, you need to go to tables that will predict, morbidly, when the second person is likely to pass; these tables are called the 'last to die'. In either of these tables, you look up the age of the life estate owner or owners in the tables located here:,,id=206601,00.html

For a single owner, you look up the row with the owner's age and then look across to the column with the applicable interest rate for that month. If a couple age 70 and 65 own a life estate, you look up the table for age 70, which will then have a second column from 1 to 69; you then look at the row for 70-65 and then the column with the applicable interest rate. The figure you find there is the percentage of the total value of the asset that is attributed to the remainder interest. Thus, if the asset is worth $100,000, and the percent is .57890, then the remainder interest value is $57,890.

FYI, the definition of the 7520 interest rate: "Pursuant to Internal Revenue Code 7520, the interest rate for a particular month is the rate that is 120 percent of the applicable federal midterm rate (compounded annually) for the month in which the valuation date falls. That rate is then rounded to the nearest two-tenths of one percent. For example, the rate that is 120 percent of the applicable federal rate (compounded annually) for January 1998 is 7.13 percent. That rate is then rounded to the nearest two-tenths of one percent or 7.2 percent for purposes of IRC 7520."

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Peter R. Scribner, Esq.
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