30/04/2012

People today can be part of several families over their lifetime. How do you gift your house to your kids but not leave out your spouse?

Dave has two adult children from a previous marriage. He's lived with Susan since his late forties and they own their own home. After he dies, he wants to ensure that Susan can continue to live in the home but doesn't want to risk his share of it going to Susan's kids or any new partner she chooses in later life and their family.

One way Dave can solve this is by drawing up a Life Interest Will. A life interest provides an equitable interest of an asset for the duration of a person's life, typically giving the 'life tenant' the right to possession and enjoyment of the asset and its income until their death. Once the life tenant dies, in this case Susan, ownership of Dave's interest in the asset goes to the persons entitled to take the asset, in this case his children.

But is it as simple as that? If Dave and Susan own their home as 'joint tenants', Dave's half share automatically passes on his death to the surviving joint tenant, Susan, without reference to his Will. The same applies to any bank accounts, shares or other assets they own as joint tenants. This means that these joint assets would be available for the remaining spouse to access and dispose of at their own discretion, including as part of a later relationship. 

If they converted the ownership of their home to 'tenancy in common in equal shares' Dave could deal with his half share of the home and any income from his personal assets as a life interest for Susan in his Will and then it would pass to his children.  

On Dave's death his share of the property under a life interest Will is transferred to trustees, typically the Executors, who hold it according to the instructions contained in his Will. Usually these instructions would allow Susan to live in the house for her lifetime and use the income of his estate to live on.

In creating a life interest Will it is useful to think about whether your spouse or partner can afford the upkeep on the house and live comfortably for the rest of their life.  Leaving money for them outright in a cash legacy as a ‘nest egg’ and to enable them 'to live in the style to which they are accustomed' is important as noted in Gigliotti v Gigliotti [2002] and Luciano v Rosenblum [1985] respectively. Leaving instructions on how to maintain the asset in good repair is also useful to preserve its value for the later beneficiaries, in this case, Dave's children.

When creating a life interest, it is also wise to consider the long term requirements of your 'life tenant'. For instance, providing for Susan to simply live in the house for her lifetime may prove an inadequate provision for her ‘proper maintenance and support’ once she gets older or experiences poor health, as noted in the cases of Court v Hunt [1987] and Szlazko v Travini [2002].

Your Will could also specify that the property be sold and the proceeds used to purchase a smaller home or retirement village accommodation as part of the life tenancy, provided that they do not diminish the value of the half interest which you have left them.

It is important to structure the life interest to ensure the survivor has the use but not ownership of the asset. In a blended family situation, a life interest will may be an appropriate method to balance the interests of a second partner against the need to benefit the children of an earlier relationship.

If you have any questions in relation to this article, please contact TOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.