A life estate (often referred to as a life interest) is a term used to describe a type of “ownership” or use of property (or other assets) for the duration of a person’s life. The general concept is that the home is held for the benefit of another person (called a life tenant) to live in for their lifetime subject to certain conditions (including that the beneficiary to the life estate is not entitled to sell, gift or bequeath the property to another person).
When are life estates used?
Life estates are often used as a wealth protection measure, especially by blended families.
A common scenario is where the parties re-marry where both have children from a former relationship or marriage and each wants to ensure that their assets are inherited by their respective children.
Couple A and B must hold the title to the family home as tenants in common (rather than as joint tenants). A’s will provides that his/her interest in the family home be held by his/her executor on the basis that B has a right to enjoy the benefit of A’s interest in the family home during her/his lifetime. Upon B’s death the home would be sold and the late A’s interest in the home would pass to his/her children.
How do I set up a life estate?
A life estate is created by a person’s will. There is nothing in place until the person dies. Upon their death, the life estate is created. It is then generally administered by the executors for the life tenant’s lifetime in accordance with the terms of the will.
Are there conditions which may apply to a life estate?
Practical issues to be considered include:
- Who pays the council rates, the water rates and the insurance premiums?
- Can the life tenant rent out the home and receive the income?
- Who maintains the home such as maintaining the gardens, painting the home and so on?
- What if the life tenant does not maintain the home?
- What if the life tenant does not want to live in the home?
What if a life tenant wants to downsize?
If the property is sold to allow the life tenant to downsize, are all the funds from the sale to be applied to the purchase? What happens if there are excess funds left over after the purchase?
All of these issues ought to be considered and, where appropriate, addressed in the terms of the life estate.
What is the benefit of having a life estate?
From the point of view of the will-maker who creates the life estate, it potentially gives some protection about where the asset passes when the life tenant dies.
From the life tenant’s point of view, where they are a vulnerable beneficiary (such as a professional person or a company director) who prefers not to hold assets in their own name (to avoid those assets being exposed to a claim for negligence or a claim of a breach of duty as a director), a life estate gives them some wealth protection.
What are the disadvantages of having a life estate?
A spouse with a life estate in respect of the family home may feel that the rights under the life estate are restrictive. They may feel that they are not in control of their use and enjoyment of the family home and remain answerable to the executors.
Although the life estate might allow for the family home to be sold and a substitute property purchased to which the same life interest arrangements would apply, there are some negative tax impacts. Generally, any capital gains tax or land tax exemptions for the principal place of residence will continue to apply in respect of the home for which the life estate has been granted. But they may not attach to any substitute property.
What Now?
Contact us now if you or someone you know has any questions regarding life estates or needs help to establish a life estate. We can draft a will for you including a life estate specifically tailored to your needs.
