Legal Definitions - terminable interest

A terminable interest refers to a right or claim to property that is not permanent and will end upon the occurrence of a specific event or after a certain period. When a terminable interest ends, the property typically passes to another designated person or reverts to the original owner. This concept is particularly relevant in estate planning and tax law, especially when determining whether certain gifts or bequests qualify for deductions, such as the marital deduction.

Here are some examples to illustrate a terminable interest:

• Life Estate in Real Property: Imagine a grandmother who owns a house and wants her son to live there for the rest of his life, but after his death, she wants the house to go to her granddaughter. The grandmother creates a will that grants her son a "life estate" in the house. This means the son has the right to live in and use the house for the duration of his lifetime.

  How it illustrates the term: The son's right to the house is a terminable interest because it is not permanent; it automatically ends upon his death. He cannot sell the house or pass it on to his own heirs, as the property is designated to go to the granddaughter once his interest terminates.

• Income from a Trust for a Fixed Period: A wealthy benefactor establishes a trust that provides an annual income to their niece for a period of 15 years, or until the niece completes her medical residency, whichever comes first. After this period, the remaining trust funds are to be distributed to a charitable organization.

  How it illustrates the term: The niece's right to receive income from the trust is a terminable interest. Her claim to the income is limited by either the 15-year timeframe or the completion of her residency. Once either of these events occurs, her interest in the trust's income terminates, and the funds are redirected as specified by the benefactor.

• Commercial Lease Agreement: A small bakery signs a seven-year lease agreement for a storefront in a bustling downtown area. The lease specifies the terms of occupancy, including rent payments and responsibilities for maintenance.

  How it illustrates the term: The bakery holds a terminable interest in the storefront. Their legal right to occupy and operate their business in that specific property is limited to the seven-year term of the lease. At the end of those seven years, their interest terminates, and the landlord regains full possession of the property, unless a new lease agreement is negotiated.