Life interests – friend or foe
A life interest is a type of ownership interest in property which lasts for the life of the party to whom it has been granted - the life tenant.
On the death of the life tenant, ownership of the property then passes to the ‘remainderman’ named in the life estate agreement, generally being a Will.
It can often be seen in the case of a second marriage, in which there is a need to provide for a spouse but also an equal need of the testator to preserve or quarantine the asset for the benefit of another party, often the children of the testator.
A life interest may also arise when the testator and their spouse have young children and the testator is anxious that the survivor may enter into a new relationship in the future.
In this situation, a life interest could be viewed as beneficial to secure the family home for the upbringing of the children but transferring that asset to the testator’s children once they have become adults.
The disadvantages that can arise through the provision of a life estate or life interest are often amplified by the terms of the life estate agreement or relevant clause in the will.
In particular, difficulties often arise due to poor drafting and ambiguous provisions. When a testator is considering granting a life estate, both the testator and the will drafter need to give special consideration to matters such as:
• Who will be responsible for the payment of outgoings and liabilities affecting the property?
• Who will be responsible for attending to and the payment of the upkeep and maintenance of the property?
• What will be the consequences if the life tenant fails to comply with his or her obligations and responsibilities?
• Does the will contain an exclusive right to occupy the property?
• Does the will clearly provide an option to terminate the life interest, be it by the life tenant or the remainderman, and the steps and procedures that must be followed in order to effectively surrender the life estate?
• If the life estate is surrendered early, who will bear the costs of any capital gains tax, stamp duty or other liabilities that may arise in consequence?
Accordingly, when considering incorporating a life interest provision in the will, consideration needs to be given to the testator’s wishes, the intended beneficiary’s circumstances and the property in question.
There is no “one size fits all” approach and such provisions need to be considered and drafted on a case by case basis.
Emma Nisbet is an associate at de Groots wills and estate lawyers specialising in estate planning and helping executors to administer deceased estates.