There are many different options available to Will-makers when it comes to distributing their assets after death. Leaving a Life Interest, or a Right to Occupy is becoming increasingly common for Will-makers who have ‘competing interests’ for whom they wish to provide. For example, if the Will-maker has remarried but also has children from a previous relationship.
These options are similar and the specifics can be difficult to understand, but it’s important for Will-makers to be aware of the benefits and implications of each to ensure that their estate is administered in the way that they wish.
What is A Life Interest?
A life interest is granted if a property or other asset (such as shares) is held on trust for someone’s benefit, for his or her lifetime. This person is known as a ‘life tenant’ and is entitled to any income generated by the property or asset for the duration of their life. When the life tenant dies, the asset is distributed to the Beneficiaries as stated in the owner’s Will.
An example of where a Life Interest may be appropriate is when the Will-maker has a second spouse and children from a previous relationship. They may wish to allow their second spouse to live in the home for a period of time, and then pass the home to the children as an asset.
A Life Interest could also be left as an investment, for example to provide income for the lifetime of the spouse.
What is A ‘Right to Occupy’?
A ‘Right to Occupy’ is an alternative solution to a Life Interest, where the Will-maker leaves an appointed person the right to live in the home rather than a Life Interest in it. This is the preferred option where the Will-maker wants to implement an added asset protection strategy.
The entitlement to reside at the property will usually be subject to conditions, such as keeping the property in good repair and paying bills and other expenses. In this case, the Beneficiary can’t rent the property to someone else, or receive any income from the property. When the entitlement ends, the property will be transferred or sold, and the proceeds of the sale will be distributed to the Beneficiaries in accordance with the Will.
The Difference Between a Life Interest and Right to Occupy
A Life Interest is an asset that can be used to generate income, and as such, if the spouse living in the home was forced to declare bankruptcy, there is a possibility that they could be forced to move out of the house and rent it out so that they could use the income to pay creditors. However, if the spouse has a “Right to Occupy”, they cannot be forced out of the home.
Case Study: McElligott v Public Trustee of Queensland
The recent Queensland case of McElligott v Public Trustee highlights the importance of these terms, as the difference between them can have a huge impact on what Beneficiaries receive from a Will.
In this case, the deceased died in September 2012 with a number of debts attached to her estate. These debts couldn’t be paid without selling the deceased’s property, which was worth approximately $700,000.00 – $800,000.00.
The deceased’s Will stated:
- Her house and land were to be held on trust to permit the deceased’s daughter and son to have full use of the property for a period of five years from the deceased’s date of death.
- The income produced by the property was to be applied as income under the Will.
- On the failure or termination of the life interest, the Trustee is to hold the property on trust to form part of the residue of the estate.
The Executor argued that the Will entitled the deceased’s daughter and son to a personal right to reside in the property (a ‘Right to Occupy’), whereas the Public Trustee submitted that the daughter and son had an equitable estate in the property (a ‘Life Interest’).
The Executor had to sell the house to pay the Estate’s debts. As such, whether the intention of the will was to give a ‘Right to Occupy’ or a ‘Life Interest’ consequently determined whether the deceased’s daughter and son would be entitled to the proceeds of the sale.
The Court found that the deceased’s daughter and son had been granted a ‘Right to Reside’ and not a ‘Life Interest’, so they were not entitled to any of the proceeds from the sale of the property.