Protecting Wealth for your Children from Predators of your Partner.
A successful estate plan is a coming together of a number of strategies and tools aimed to achieve your goals for the distribution of your estate, while addressing any prevalent issues, such as protection of the assets, family breakdowns and taxation consequences.
A life interest, in the context of estate planning, is a form of Testamentary Trust where the Testator grants an individual (in most cases the surviving spouse), a lifetime benefit from an asset or the income from an asset of the estate of the Testator.
The person to which the life interest is granted, also called the ‘life tenant’, is essentially granted the right to enjoy the asset for their lifetime or until such time as the life tenant stops complying with the terms of the trust. The benefit of a life interest is that when it ends, the remainder of the asset is passed down to the intended beneficiaries of the Testator. Ownership of the asset is held by the intended beneficiaries, and the life tenant is simply granted the benefit of the use of the asset for the duration of their lifetime.
A life interest is flexible in that it can be used to allow the life tenant to access income only, or may include capital and income.
How can a life interest be used as an estate planning tool?
A life interest is an estate planning tool that can be used in a number of situations, the most common of which are situations where couples are in their second or third marriages, often with children from each marriage.
In this situation, couples who have married later in life and have brought assets into a marriage may wish to ensure that they are able to pass their assets to their respective children. In these situations, assets are often kept separate, with the exception of the couple’s primary residence. A life tenancy allows an individual to ensure that their spouse is provided for, for his or her lifetime. Then, once the surviving spouse has passed away, the Testator’s share of the asset is then passed to the intended beneficiaries of the Testator (usually the biological children of the Testator).
As you can see, the life interest is a way of ensuring that the entirety of the Estate of the first spouse to pass away does not pass to the Estate of the surviving spouse. A life interest ensures that the first spouse’s share of the primary residence can still pass through their bloodline to their children, without any sacrifice of standard of living of the surviving spouse.
Another situation where a life interest can be beneficial is where a couple has amassed a sizeable Estate. If, after the passing of their spouse, the surviving spouse re-partners, a life interest will ensure that the assets of the life interest can be used to the benefit of the surviving spouse without becoming a part of the surviving spouse’s Estate – which will protect the asset upon the death of the survivor or on separation from the future partner. The asset is instead preserved for the intended beneficiaries (usually the couple’s children).
How do we grant a life interest?
As stated above, the most common asset of a life interest is the primary residence of the couple. Most couples will hold their primary residence as ‘joint tenants’. Joint tenancy is essentially a type of ownership of property where two or more owners hold the whole of the property jointly with the other owners. This means that each owner has an equal entitlement and interest in the property. The most relevant aspect of joint tenancy is that upon the passing of one joint tenant, the surviving joint tenant (or joint tenants) acquires the deceased joint tenant’s interest in the property automatically. The effect of this is that the interest that belonged to the deceased joint tenant will not form a part of his or her estate.
If you hold your primary residence as joint tenants with your spouse at the time of your passing, your primary residence will then pass to your spouse in its entirety. The whole of that property will then pass to the surviving spouse’s estate to be distributed in accordance with his or her Will, which can be undesirable in circumstances where your spouse remarries or where each spouse has children from a previous relationship.
In order to create a life interest, therefore, it is often necessary to ‘sever’ the joint tenancy and causes spouses to hold the interest in their property as ‘tenants in common’. The difference between tenants in common and joint tenancy is that, should a tenant in common pass away, the share of the property owned by the deceased spouse passes in accordance with the provisions of the Will of the deceased tenant in common. Shares in property owned as tenants in common can be transferred independently of each other.
Tenants in common allows a spouse to create a life interest to the benefit of the surviving spouse over their share of the property, while their spouse still owns the remaining share. Then once the life tenant has died, the property passes half in accordance with the first spouse’s estate, and half in accordance with the second spouse’s estate, to their intended beneficiaries.
If you think that a life interest may be beneficial to your circumstance, or you would like some information about life interests and how they work, please do not hesitate to contact us to discuss this further. We are able to assist you to incorporate life interests into your estate planning, and we are also able to assist you with severance of your joint tenancy if required.
For all questions or further information, we welcome you to contact our offices on (07) 5574 3560 or email info@nautiluslaw.com.au. We thank you for considering Nautilus Law Group.
Submitted by: Katrina E. Brown BA JD ATIA TEP SSA
