Remainder interest in farm vested in remainder beneficiary; creditors’ rights not cut-off

A common estate planning technique involves the use of a life estate coupled with a remainder. Under this arrangement, a person leaves property to someone else for life (known as the life estate holder) with the property passing to another person (known as the remainder holder) at the death of the holder of the life estate. In farm settings involving married couples, it is common to utilize a life estate for the surviving spouse with a remainder interest to the children. The surviving spouse gets the income from the farm for life and can live in the home. When the surviving spouse dies, the farm passes to the children, but the value of the farm is not included in the surviving spouse’s estate for federal estate tax purposes - it “bypasses” the surviving spouse’s estate.

A remainder interest is a future interest. That means the remainder interest holder has an interest in the property, but does not yet have possession of the property. Future interests can usually be sold, gifted, willed or otherwise disposed of by the holder if the interest has “vested” - the point in time when it can be transferred to any other party. If the interest has vested, creditors can also claim an interest in it. That is precisely what was involved in this case - a life estate/remainder arrangement involving farmland where the question was whether the holder of the remainder interest had sufficient rights in the property for it to be subject to creditors’ claims.

Under their wills, the grandparents created a life estate/remainder in about 400 acres of farmland. The survivor was granted a life estate in the farm, with the remainder to a son for life followed by a remainder to his children (grandchildren of the grandparents) that were born before 1983. The grandfather died in 1974 and the grandmother in 1984. Thus, the property passed to the son for life, with the remainder to his children born before 1983. One of those children, however, pre-deceased the father, and the creditors of his estate claimed an interest in the pre-deceased child’s remainder interest. The estate claimed that the decedent did not have a vested interest in the remainder interest at the time of death. The trial court disagreed, and the appellate court affirmed.

The court noted that the class of potential beneficiaries closed as of 1983 and the remaindermen became ascertainable. Also, previous Iowa caselaw holds that a remainder interest generally vests at the time of death of the creator of the interest, and that the death of the life tenant only fixes the time for enjoyment of the property in the remainder interest holder, it does not determine whether the interest vests. That was the situation in this case, and there was nothing in the grandparents’ wills to indicate that they intended otherwise. The result - the remainder interest in the farmland was subject to the claims of creditors of the grandson’s estate. In re Estate of Sinner, No. 6-680/05-1593, 2006 Iowa App. LEXIS 1118 (Iowa Ct. App. Oct. 11, 2006).