Tips and traps for grant­i­ng life estates

Gen­er­al­ly speak­ing, a life estate gives full own­er­ship rights to the recip­i­ent, oth­er than the right for the recip­i­ent to pass the prop­er­ty to their heirs upon their recip­i­en­t’s death. A life estate may be grant­ed with cer­tain con­di­tions attached.

Life estates are a com­mon mech­a­nism used as part of estate plan­ning in blend­ed fam­i­lies. A com­mon sit­u­a­tion where life estates may be used is as follows:

• only one part­ner of the rela­tion­ship owns the fam­i­ly home (Home);
• one or both part­ners has chil­dren from oth­er rela­tion­ships and do not have any chil­dren together;
• the Home was acquired pri­or to the begin­ning of the cur­rent rela­tion­ship; and
• the part­ner who owns the Home (Home Own­er) wants it to stay with­in their bloodline.

In the above sit­u­a­tion, the Home Own­er may choose to grant a life estate to their part­ner, with the Home to pass to the Home Own­er’s chil­dren upon the part­ner’s death. 

Key con­sid­er­a­tions for a life estate

The case of Ng v Lau; In the Estate of Ken Kui Yuen Lau [2020] NSWSC 713 high­lights the issues with life estates that need to be care­ful­ly con­sid­ered when mak­ing the deci­sion to grant one. The deceased’s will left his wid­ow from his sec­ond mar­riage, Mary, a life estate in their mat­ri­mo­ni­al home (sub­ject to her being liable for main­tain­ing the prop­er­ty and keep­ing it in good repair) and half of the residue which includ­ed an invest­ment prop­er­ty. Mary was also the ben­e­fi­cia­ry of the deceased’s super­an­nu­a­tion. The oth­er half of the residue was left to the deceased’s son from his first mar­riage, Gary. Gary would inher­it the mat­ri­mo­ni­al home upon Mary’s death. Mary made a fam­i­ly pro­vi­sion claim on the deceased’s estate. 

The Court high­light­ed the fol­low­ing issues in respect of the life estate grant­ed to Mary: 

• the life estate was inflex­i­ble – the life estate grant­ed by the deceased did not give Mary the abil­i­ty to change the home, espe­cial­ly in cir­cum­stances where she was 74 years old and would like­ly need to move to more suit­able accom­mo­da­tion in a few years. In the cir­cum­stances, the Court made a ​“Crisp order”, which is an order that gives the ben­e­fi­cia­ry of a life estate the right, if required, to secure more appro­pri­ate accom­mo­da­tion such as a retire­ment vil­lage or nurs­ing home;
• the life estate was insuf­fi­cient pro­vi­sion – although Mary was enti­tled to half of the residue of the deceased’s estate, the Court found that on the facts of this case, this was insuf­fi­cient pro­vi­sion in cir­cum­stances where Mary was required to keep the mat­ri­mo­ni­al home in a rea­son­able state of repair and did not have the option to swap the mat­ri­mo­ni­al home for more appro­pri­ate accom­mo­da­tion; and
• the life estate is an admin­is­tra­tive bur­den – the main­te­nance of a life estate means that the execu­tor appoint­ed under a will is required to man­age the estate for many years. At the time of the hear­ing, Mary had a life expectan­cy of 15 years. This meant that she and the deceased’s son would remain as co-execu­tors for a sig­nif­i­cant peri­od of time. The Court also acknowl­edged that there were some dif­fi­cul­ties in the rela­tion­ship between Mary and Gary but that this would be resolved by Gary’s vol­un­tary res­ig­na­tion as co-executor.

In addi­tion to the issues con­sid­ered by the Court above, a Home Own­er also needs to con­sid­er the fol­low­ing issues: 

• life estates delay inher­i­tance – as stat­ed above, it is com­mon for life estates to run for many years, par­tic­u­lar­ly in cas­es where the per­son receiv­ing the life estate is of sim­i­lar age to the oth­er ben­e­fi­cia­ries. If the Home was the main asset of the Home Own­er, this could delay the inher­i­tance of oth­er ben­e­fi­cia­ries for many years; and
• life estates require resources to main­tain – a life estate may be grant­ed on the basis that the Home Own­er’s estate will con­tin­ue to pay for out­go­ings, insur­ance and main­te­nance of the prop­er­ty. If the estate does not have oth­er assets, it may not be able to meet these costs.

Con­clu­sion

This case reminds us that estate plan­ning, par­tic­u­lar­ly for blend­ed fam­i­lies, can be com­plex. If you are think­ing about grant­i­ng a life estate with the aim of keep­ing your Home with­in your blood­line, you need to care­ful­ly con­sid­er the prac­ti­cal issues for your estate. Thought should be giv­en to the bur­den on your execu­tor and oth­er ben­e­fi­cia­ries espe­cial­ly when life estates could result in a fam­i­ly pro­vi­sion claim against your estate.