Life Interests
In circumstances where there is a second relationship and one (or both) parties have children from their previous relationship, it is very common to see life interests used as a method of giving property (often the family home) to the surviving spouse for life (the life tenant) when preparing a Will.
Then, on the death of the surviving spouse/life tenant, the property is transferred to the children of the Will maker (called the remaindermen). A life interest holder has an entitlement to use of an asset (including income from the asset) during the life tenant’s life.
A first cousin to the life interest is the ‘right to reside’. This is as its name suggests – an interest under a will allowing a right to reside in a property which is lost if the beneficiary vacates. A right to reside is lower in value than a life interest.
Difficulties With Life Interests & Rights to Reside
One of the regular problems with these interests in Wills is that they carry the risk of a challenge to the Will by the surviving spouse who receives the life interest/right to reside.
For example:
Richard leaves a life interest in his home to his second spouse Nigella and, upon her death, the property is to be taken by the children from Richard’s first spouse. Nigella’s assets are not substantial, but Richard has substantial superannuation and shares in addition to his home. His children take the superannuation and other assets. Richard and Nigella have been living together for seven years.
A challenge to the terms of Richard’s Will by Nigella on the basis that the life interest did not provide adequately for her needs would, in all likelihood, have good prospects of success.
An analysis of relevant case law shows that it is the possibility that the surviving spouse may be forced from the protected environment of their home for life by a range of reasons (e.g. advancing age or sickness) which tends to concern the courts and place the willmaker’s estate at risk of a challenge. Potential challenges may be averted by making the life interest one which would meet Nigella’s changing accommodation requirements.
Flexible Life Interest
A flexible life interest presents an alternative which would provide the life tenant with a number of options when considering a move from their home for life to an aged care facility. Such a life interest would allow the trustee and the life tenant to fund such a move by selling the home or borrowing against it.
The recent changes to aged care funding would require a life tenant such as Nigella to pay for her entry to an aged care facility by a refundable accommodation deposit (RAD). A RAD can be paid as a lump sum, a daily accommodation payment (a DAP) or a combination of the two.
Although such a provision in a will would allow the trustee to provide for the life tenant’s housing needs after the tenant is forced to leave their home, it raises a further issue.
If the move to aged care was funded by a lump sum RAD, the trustee would wish to ensure that the refund of the RAD which would occur on the death of the life tenant would be refunded to the willmaker’s estate.
In fact, it is normal practice for aged care providers to refund lump sum RADs to the estate of the resident – i.e. the estate of the life tenant rather than that of the willmaker. In the example given previously, if the refund were to be made to Nigella’s estate, Richard’s children would not receive the capital Richard wished them to take.
Our approach
There are several possible approaches to this problem. We believe the better approach is to provide, in the Will, provisions that gives the trustees a right to recover any RAD refund from the life tenant’s estate.
Life interests and rights to reside are commonly employed to solve problems associated with ‘blended families’. That is, where one or both partners of a relationship have children from a previous relationship. However, they have ‘side effects’ that must be considered carefully. The right result for both willmaker and beneficiaries will always involve serious thought and careful drafting.
