Getting the Most Out Of Life Estates

A life interest entitles a beneficiary (‘life tenant’) to make use of and enjoy specified assets (or income from those assets) during their lifetime. When the life tenant passes away, these assets are then distributed to any remaining beneficiaries.

The real benefit of life interests is their flexibility. As an example, a life interest can be granted over a property so that a beneficiary can make use of it for the duration of his or her life, and in more complex life interests, so can his or her children. Life interests may be granted over both real and non-real estate property, and given that they are a species of trust, can have near limitless directions or limitations in use.

The Need for Foresight

While life interests are a fantastic alternative to simply willing property over to a beneficiary, life interests require significantly more foresight. Returning again to our real estate example, while a beneficiary may receive a life interest over a property, he or she will more than likely be required to pay for any maintenance, taxes and other incidental expenses associated with the property.

In overcoming this difficulty, some life interests will provide that the expenses associated with the property be paid out of the deceased’s estate (in other words, out of funds granted to other beneficiaries). The net effect of this provision is that beneficiaries may find that they are being forced to pay for the expense of another person long before they ever realise the benefit of the property – remembering that once the life interest is over, it is distributed amongst any remaining beneficiaries.

Another feature of life interests not often considered is the effect of stamp duty. When a life interest is granted, there is no conveyance of title (as the estate of the deceased retains the title), and as such, no stamp duty is owed.

When the life interest comes to an end, the title for that property will be given over to any remaining beneficiaries, so conveyance is required. As a result of this conveyance, stamp duty will also need to be paid – unfortunately, this stamp duty will be calculated at the present market value of the property, which over a period of time may increase dramatically. Once again, the result of this life interest is yet more expense at the hands of the beneficiaries.

What Ought a Will-Maker (‘Testator’) Do To Avoid These Issues?

As with any plan for the future, a good will takes into account possible contingencies. While it is impossible to plan for every possible contingency, it is possible to grant the holder of the life interest the flexibility to deal with problems as they arise.

A well-planned life interest will, for example, include a right to the life tenant of a property to allow for the property to be sold in order to purchase a new more suitable property that better suits the changing needs and financial circumstances of the life tenant, or even contemplate the sale of the property to fund his or her entry into a nursing home. Naturally, any residual funds from this sale would be held in a trust for the remaining beneficiaries.

The issues that life interests raise are well-known to professional estate planners. If you are considering including a life interest in your will, a discussion with a professional estate planner provides the benefit of saving your beneficiaries from unanticipated headaches decades down the line.