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Valuations of life and remainder interests

Cumpston Sarjeant assists Estate Executors, their advisers, and others in valuing life and remainder interests.

There are a number of situations where it may be necessary to value an interest in an asset:

  • Rather than receive their entitlements as life beneficiary and remainderman, one of the beneficiaries might seek to apportion the current value of the asset subject to the life interest immediately.
  • In a divorce proceeding, if one spouse has a life or remainder interest, such an interest may be deemed to be relevant in the distribution of assets. A value then needs to be placed on the interest.
  • Establishing a market value of an interest in an asset for use in financial accounts or to calculate the appropriate stamp duty.

What is a life interest?

An interest in an asset is an entitlement to the income or capital proceeds of the asset.

A life interest is an entitlement to an asset for the term of the beneficiary’s life. For example a life interest in a property would involve an entitlement to live in a property for life. A life interest in an investment portfolio may involve receipt of income generated by the portfolio for life.

On the death of the life beneficiary, the asset which had been subject to the life interest may be liquidated, and the proceeds distributed to the nominated capital beneficiaries. This interest in an asset, subject to the death of the life beneficiary, is the remainder or residual interest.

Life and remainder interests are themselves examples of contingent interests. A contingent interest is any interest where the entitlement depends on a certain event occuring. A life interest depends on the individual surviving. Another contingent interest would be an individual who, under the terms of a will, becomes entitled to a certain asset on reaching a given age.

How is a life interest valued?

Interests in an asset can be valued under a discounted cash flow model using the asset’s yield (net of costs incurred in maintaining or managing the asset) and allowing for the probability of the defined period or relevant event (for example, the life beneficiary’s chance of survival).

The economic value of the interest will therefore vary depending on the length of title of the asset, the mortality of the entitlement holder(s), the probability of a contingent event and the internal yield of the asset.

The valuation principle is intended to be fair to all parties with an interest in the asset. Were the same principle to be used to estimate the present value of the interests of each beneficiary, the total would equal the assumed value of the asset.

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Paul Thomson