Life Estates – What are the Benefits and Risks?
Life Estates may be utilised where the testator wishes to control the disposition of the family home through his or her estate rather than leave it to the beneficiary.
They offer several benefits, particularly when it comes to blended families, and situations where the family dynamic may be strained. There are several disadvantages with creating a life interest so careful consideration on this matter must be made to ascertain if this is appropriate for you and your family’s circumstances.
Firstly, what is a Life Estate? A Life Estate is a term which grants a beneficiary full ownership rights over a property except the right for the beneficiary to pass the property to their beneficiaries upon their death.
This means that while the beneficiary has the right to reside in the property, the property will not form part of the beneficiary’s estate once they die.
What does a Life Estate mean for a life tenant?
If somebody receives a Life Estate under a Will or Deed, they have a right to possession and enjoyment of a property. This also includes receiving income from the property.
A Life Estate is generally operative for the lifetime of the life tenant. Upon the death of the life tenant, ownership of the asset goes to the ‘remaindermen’. The remaindermen are the person or persons entitled to take the asset upon the termination of the Life Estate and this is addressed in the Will or Deed creating a Life interest.
How is a Life Estate Created?
A Life Estate is generally created under a Will or a Deed. Where property is involved, the Life Estate may be registered with the NSW Land Registry Services, or the property may be held by the executor or trustee of the Will on behalf of the Life tenant.
It is also possible to create a Life interest, where one person holds the life interest during the lifetime of another person (known as an estate pur autre vie). In another words, if person A holds a life estate measured by his life, and then transfers his interest to person B for the rest of person C’s life, then person B has a life estate pur autre vie. Person B’s estate ends when person C dies.
Advantages of a Life Estate
There are a number of benefits for individuals considering the creation of a Life Estate.
The family dynamic has evolved over the years, and many family arrangements are now more complex and blended.
The creation of a Life Estate may be ideal in situations where both partners have children from former relationships. Each partner wants to ensure that their children will inherit their assets. Therefore, a life interest could ensure that one partner (X) has a right to enjoy the benefits of the other partner’s (Y) property during their lifetime. Upon the death of (X), the home would be sold and the home would pass to the children of (Y).
From the perspective of the Testator, the creation of a Life Estate is an assurance that they can control where the asset passes upon the death of the life tenant.
Disadvantages of a Life Estate
Difficulties can arise with the creation of a Life Estate.
The major disadvantages include:
- Conflict between the life tenant and the remaindermen. Issues can arise when the relationship between the life tenant and remaindermen is not amicable, especially as the remaindermen have no ability to deal with the property unless an agreement is reached between the parties to sell the property to a third party.
- An application by the spouse/life tenant for a family provision order under the Succession Act 2006. Family provision claims can be made by life tenants, where the life estate is deemed to be an insufficient provision. Depending on the circumstances, this could mean that the Life Estate may be inadequate for a younger life tenant who wishes to manage their own financial affairs; or it could mean that for an older life tenant, there is no option to exchange the property for more suitable accommodation.
- Maintaining the asset. The Will needs to specify who is responsible for maintaining the asset (including any repairs) during the life tenancy: will it be the life tenant or the executor on behalf of the Estate. The life tenant or the Estate may not have sufficient funds to maintain the asset, pay ongoing Council and Water rates and keep the property insured. This obligation extends to protecting the interests of the remaindermen, and it can result in a lot of effort considering the life tenant does not own the property. This can be an ongoing source of tension between the life tenant and the executor of the Estate.
- Taxation consequences: there are income tax and capital gains tax consequences for the life tenant and the Estate.
Estate planning for blended families can be complicated. While Life Estates offer numerous advantages, the creation of a Life Estate also comes with risk.
If you are considering the creation of Life Estate, we recommend you seek our advice to ensure that this decision is right for you and your family’s circumstances.