One particular use of testamentary trusts is to create a life interest or right of occupancy. It can be used to create a fixed or flexible life interest.
Life interest is a form of testamentary trust where a person (usually a surviving partner) is granted a lifetime of fixed income and benefits, and use and enjoyment of all or part of the assets (eg: principal place of residence) of the deceased estate. This is useful if you wish to ensure that the capital assets are preserved after the lifetime beneficiary dies.
The executor or trustee is usually given the express power to pay any taxable capital gain that might be assessed against the lifetime beneficiary with funds from the estate.
By creating a life interest you are able to allow the life tenant to enjoy the asset (it can be the whole of your estate or just your home) for their lifetime and upon death the asset or fund is given over to someone else (for example your respective children).
The person who holds the life interest is called the life tenant and the life tenant has the right to possession and enjoyment of the asset and its income until their death or until they abandon the interest.
A whole range of conditions can be applied to a life interest but the interest always ends on death and sometimes if the life tenant finds another partner. You can even provide that it ends at the expiry of a specific period of time – for example, after 10 years.
Once the life interest ends the gift/asset reverts to the ultimate beneficiaries – usually children.
If a life tenancy is created in respect of land the life tenant has the right to occupy the land/home during the life tenancy and depending upon what conditions are imposed in the Will, can lease the property, improve the property and sell and replace with another property (for example if a down size was required due to age or infirmity).
Where the owners of the property are joint tenants it is necessary to sever the joint tenancy to a tenancy in common so that each owner can gift the other a life interest in their ‘share’ of the property ultimately preserving the actual gift of property for children or other beneficiaries.
This can be important in a blended family that has mixed assets or where the asset mix of the families is not equal.
A life interest in property granted to a spouse will enable him or her to have the use of the property during his or her life time. The person granting the interest can then have certainty that his or her child (or children) will benefit upon the spouse’s death.
A life interest is one way to give the benefit of an asset while preserving it for the ultimate beneficiaries. It is a very useful tool where blended families are involves.
The life tenant is generally responsible for maintaining the asset during their life tenancy though it is not uncommon for an Estate to pay the costs of insurance, rates, taxes and maintenance.
The major disadvantages of life interests (in property) are that the life tenant may have difficulty leasing the asset or securing a loan against the asset as they will only hold part of the interest themselves with the other part belonging to the ultimate beneficiary.
There can also be conflict between the life tenant and the ultimate beneficiary as the life tenant may have no motive to improve the asset or may not look after the asset. Accordingly, the appointment of the executor is an important consideration.
Right of Occupation
A right of occupancy is used to extend the principal place of residence exemption from capital gains tax following the death of the owner. By giving a person the right to occupy a principal place of residence in a Will, the person living in the residence is considered to be the owner of the land, and land tax is not payable - but only while the person continues to use and occupy the land.
When that person dies or moves out, the residence will form part of the original owner’s deceased estate and be distributed in accordance with the Will of the original owner.
Unlike a life interest, a right of occupancy will not allow the resident to sell or rent out the property and all rights will cease once the property is no longer occupied.
Both a life estate in your home and a right to occupancy you home can be drafted so that the individual can sell the property and acquire a replacement property and the same rights will apply to that property.
This assists with downsizing as people age and with funding an accommodation bond for a retirement village or nursing home.
The information contained in this fact sheet is general in nature and should not be relied upon as legal advice. Legal advice should be sought for specific matters. If you have any questions please call us to speak to one of our specialists.