Retained Interest is the interest that a client still owns in a gift. For example, let's say your father sets up a trust, gifts his house to the trust, and structures the trust so that the house is completely yours in ten years. Meanwhile, however, your father will continue to live in the house. Although, your father has given you the house, he is still living in it. Therefore, he has retained an interest in the house. If your father outlives the terms of the trust, then he gives up the retained interest and the house is completely yours. 

 

The impact of retained interest on taxes depends on the type of tax you're looking at. The following guidelines apply: 

• Gift Tax – Retained interest is not a part of the gift. 
• Estate Tax – If a client has retained interest in an asset, the total value of the asset is includable in the client's estate.

   

Note: The retained interest and the taxable transfer must equal the total value of the asset.

 

 

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