transfer of property with life interest

Transfer of a Life Interest

My client has a life interest in an English settlement made before 2006. The sole material asset is a freehold property with a base cost of c£50k and a current value of c.£2.5m. The property is occupied by the life tenant’s daughter and has not been the life tenant’s PPR for many years-she has a separate property which is her PPR. On my client’s death her two children will receive interests in possession. The concern is that if we extract the property from the trust a CGT liability will arise; if we do nothing there will be IHT on the life tenant’s death. She is now in her 70s but in good health. The proposed solution is that the life tenant will transfer her interest to the two children. By virtue of s.76 TCGA there will be no CGT and it appears that HMRC accept that the transfer will be a PET so that if the life tenant survives 7 years there will be no IHT on the gift. As it will then cease to be in her estate there should be no charge on death either. Any comments?

You say “it appears that HMRC accept that the transfer will be a PET”, where does that “appear”?

Paul Davidoff New Quadrant

I am surprised HMRC think the assignment of the life interest is a PET. The assignee acquires an interest for the life of the assignor (interest pur autre vie) which will terminate on the death of the assignor but because acquired after March 22 2006 does not then constitute a chargeable event: s 52(2A) IHTA.

That would seem to suggest that s3A(2) is not in point as the assignee’s estate is not increased by the acquisition of any property or increased in value. The life interest is arguably property acquired by the assignee and may be of significant value but the disposal by the assignor is treated “as if at that time he had made a transfer of value and the value transferred had been equal to the value of the property in which his interest subsisted” and the life interest itself is not “the property in which his interest subsisted” but a different property: ss. 51(1) and 52(1).

Jack Harper

It appears in IHTM 04084 where there is a reference to an “actual or potential” charge where a lifeinterest comes to an end.

No reference made here to a PET. Where a pre-2006 life interest terminates with the effect that one or more individuals then become entitled to the trust fund itself that is indeed a PET. That is not what happens when the life interest is assigned in the life tenant’s lifetime.

They have two options:

• Make an irrevocable appointment to the new beneficiary. This would convert the trust into a bare trust, with the original beneficiary making a PET. Therefore there would be no IHT periodic or exit charges in the future and there would be no issues of a gift with reservation (GWR).
• Make a revocable appointment, excluding the original beneficiary which removes potential GWR. But this would bring the trust into the RPR, meaning that the original beneficiaries are making a CLT and the trust could suffer periodic and exit charges.

Francesca’s suggestion is based on the assumption that that the trustees have a suitable power of appointment or advancement or can use the power of advancement in s32 TA 1925. I have never seen the last used revocably and an express power will usually provide specifically that it may be so used.

An irrevocable appointment would trigger the capital gain. If revocable arguably not as the beneficiary would not apparently become absolutely entitled and if it was later made irrevocable hold-over relief under s260 would apply if as she says the trust was now in the relevant property regime. However a revocable appointment must satisfy the conditions for a PET namely that it must increase the recipient’s estate or increase its value. Arguably even a revocable appointment does that (though I very much doubt it) but passes to the transferee the risk of subsequent revocation .

If the true deal is to make a revocable appointment and then make it irrevocable later it raises difficult questions about whether associated operations or Ramsay or the GAAR would apply, even where the transferee runs a genuine risk, if in practice the two events are virtually certain to occur in sequence. The risk is that the trustees could revoke and as well as the obvious practical consequences there may be tax consequences.

For CGT revocation may be a non-event as the asset seems to remain settled property of the same settlement at all times. For IHT, if it is a correct analysis that the appointment caused the asset to become part of the transferee’s estate (in order to found the PET argument), it leaves that estate on revocation; but not apparently by a “disposition”, as it does so involuntarily, so bizarrely not by a transfer of value that could be a chargeable transfer. If the strange logic of that suspicious outcome is reverse engineered it must cast serious doubt on whether a revocable appointment really has the effect that it needs to qualify as a PET.

The dilemma here is that the CGT exposure is substantial unless either the asset comes out with hold-over relief or it remains in the same settlement until the life tenant dies and s72 TCGA washes the gain but IHT is chargeable. I am not able to to see a way of the life tenant making a certain PET which will not trigger the capital gain.

I’m still mulling over Francesca’s very interesting note but I’ve looked again at the basic question as to whether we have a PET and despite the very high authority of those against it, I still think it is and think it worth setting out the statutory trail on which I rely. S.51 deals with disposals of IIPs created pre 2006. It enacts that they are not as such transfers of value but are within s.52 and are taxed as if the IIP is brought to an end. S.52 treats the bringing to an end of IIPs as effectively a deemed transfer of value. S.3A defines PETs as transfers of value. 1(c) requires that the transfer is a gift to another person and 2(a) requires that the interest is in the estate of another person. That surely must be the case; if the transferee still owns the interest when they die and the transferor life tenant is still alive then surely the interest is part of the estate of the transferee. S.3A 6 then excludes deemed transfers from being PETs except S.52 deemed transfers unless the interest is within S5(1B) which relates to interests not originally created with gratuitous effect-my case was one of an ordinary family settlement which was clearly gratuitous. Thus it seems that I am within the clear exception from the normal rule that deemed transfers cannot be PETs. Any further comments very gratefully received.

Francesca-thank you for your note. The first option is simple but would, I assume you agree, be a CGT disposal by the trustees as the property leaves the trust. The second alternative is more interesting. I’m not sure why there would be a GWR on my version-if the original life tenant irrevocably assigns her interest to the children she doesn’t reserve any benefit unless all her children and grandchildren pre-decease her in which case there would be a reversion-but we could put in a long stop charity to deal with that unlikely event.

i wasn’t thinking of an appointment by the trustees at all but a simple deed of gift to the children of her interest by the life tenant; certainly the legislation seems to envisage that such transfers can be made and I don’t believe the trust deed in this case precludes the life tenant from alienating her interest, so that the property remains in the trust and the trust remains alive so that when the life tenant dies the children take the property as the remaindermen. I suppose that this brings forward the time when ten-yearly charges arise but that is likely to be much cheaper that a CGT charge.

My interpretation of s3A (6) and 6(A) is to preserve the possibility of a PET where the disposal (and deemed termination) results in the trust property then vesting in the estate of one or more individuals. The assignment of a life interest does not do that because although s51 creates the fiction that the disposal of it is the termination of it, so s52 imposes a charge, there is no PET unless that event also results in trust property vesting in an individual’s estate. The s51 fiction does not go that far.

Instead when the life tenant dies the assignee’s new interest in possession will come to an end but because acquired after 22 March 2006 will not result in a charge to tax: S52(2A). A chargeable event e.g. 10 year anniversary or interim distribution etc can then arise under the RPT regime at a maximum effective rate of 6%. So double economic taxation is possible because the assignment was not a PET and the later RPT charge will probably relate to some part of the value charged earlier.

Furthermore the CGT may be postponed because under s76(1) TCGA the assignment is not treated as a disposal by the life tenant and the settlement continues with no one becoming absolutely entitled at that point. But if later the interest pur autre vie ends on the life tenant’s death and someone then becomes absolutely entitled there will be a charge under s71 and arguably s72 will not wash the gain because the death is of the assignor and not of the person currently entitled to the interest in possession which terminates. S72 (2) makes it clear that even where there is a chargeable disposal by the assignee, because he acquired for consideration, this is without prejudice to any concurrent s71 deemed disposal by the trustees. CGM38040 says “The consideration for such a deemed disposal is the market value of the property received by the beneficiary less any CGT charge on the trustees under TCGA92/S71(1)”, a reasonable interpretation, but continues “The charge on the beneficiary is quite separate from the deemed disposal by the trustees”.

So the gain may be postponed because of the general rule that the termination of a life interest in a continuing settlement is a non-event. And when the pur autre vie interest terminates on the life tenant’s death there will be no charge unless either then or later absolute entitlement occurs but there will be no washout of gain under s72 as there would have been if no assignment had been made.

So no PET and a CGT own goal.

There seems to be a bit of confusion over the precise nature of the children’s interests. In the initial post, you stated that the children would attain interests in possession on their mother’s death but this posting suggest that they are actually the remaindermen. Which is it?

If the children’s interest in remainder are contingent on them surviving their mother then the assignment by the mother to them of her life interest will be a chargeable lifetime transfer resulting in immediate IHT, periodic charges and exit charge on mother’s death for the reasons that have previously been set out.

If the children’s interest in remainder are vested, then the assignments will be PETs by mother as the life interest and remainder interests will merge.

Graeme Lindop Probate Consultant Coles Miller Solicitors LLP

I agree with Graeme’s last sentence about merger but we were told interests in possession followed the life interest. These could be released as a preparatory move without tax consequences. But even if a PET can be conjured up there will be a CGT charge under s71 on the trustees.

Jack Harpert

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Making sure your property passes as you choose, with a life interest trust

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Creating a will with a life interest trust over your property allows you to ensure that your home passes to those you choose, whilst also allowing you to provide for another loved one during their lifetime.

"Life interest trust wills are particularly popular with couples who have children from previous relationships, such as those in second (or third) marriages. They can also be useful to couples who have married later in life having already established independent lifestyles, and those with dependent siblings or elderly parents,"  Tony Calwell , partner and solicitor in the  wills  and  probate  team with  Watkins Solicitors  in  Fishponds . "There are many circumstances in which someone may want a life interest trust in their will, but the reasoning always comes down to protecting assets for loved ones."

What exactly is a life interest trust?

A life interest trust is an arrangement whereby your will provides for one beneficiary during their lifetime but, once that person passes away, your assets are transferred over to someone of your choosing, rather than in accordance with your lifetime beneficiary’s wishes.

A life interest trust can be created in respect of your entire estate, or in relation to only one (or several) specific assets. For example, if you have children from an earlier relationship and a property that you purchased before meeting your current partner, you might be keen to ensure that your children ultimately benefit from your home whilst being happy for your partner to receive the rest of your estate.

As the name suggests, a life interest trust typically remains in place for the remaining life of your initial beneficiary. You can, however, create a life interest trust for a set period, such as five years, or until a certain event occurs. If your children and your partner are a similar age, you might not want your children to have to wait a long time before receiving their inheritance, or risk them predeceasing your partner and missing out altogether. In such a case, a set period could be sufficient to ensure that your partner does not feel rushed out of their home without your children’s inheritance become tied up for too long.

Benefits of a life interest trust

Life interest trusts afford you greater control over the distribution of your estate. If you want to ensure that your partner has access to your assets during their lifetime, you could simply leave your estate to them absolutely. However, in doing so, you also give away total control of those assets. When your partner passes away, they could leave their estate, including whatever assets they inherited from you, to someone else entirely.

Trusting your partner to adhere to your wishes might not be enough. There are circumstances in which their estate could pass without their own control, such as if they were to die intestate because they simply forget (or never get around to) making their own will. If your partner marries after having received your estate, that marriage would typically revoke any will they made previously, meaning that they could be left intestate without even realising.

Aside from the effects of intestacy, life interest trusts are a useful tool in protecting your assets from the bankruptcy or divorce of beneficiaries. If you leave assets directly to someone who later becomes bankrupt, or who later divorces, those assets would be deemed their own for the purpose of bankruptcy or divorce proceedings. It may be your lifetime beneficiary who you have concerns about in this regard, or it could be those you intend to leave your assets to ultimately. For example, if one of your children is going through a divorce, any assets held for their benefit in a life interest trust cannot be considered as part of the proceedings and will, therefore, be safe from that child’s former spouse.

Some life interest trusts are created not to save assets for children, or other loved ones, but to protect vulnerable beneficiaries. You might want to leave your estate to a sibling who is unable to manage their own finances independently, or who is in receipt of means tested benefits. Placing your estate in a life interest trust, with that person as the lifetime beneficiary, allows the trustees to provide for their needs, without that person having to manage the money or risk losing their benefits.

Disadvantages of a life interest trust

Any trust arrangement does, by its nature, require a greater level of administration. Trusts can also attract complex tax rules. A life interest trust over an entire estate which receives a regular income and potential capital gains, as well as requiring frequent capital payments to be made for the lifetime beneficiary, are usually more costly to manage than a life interest trust over a family home in which the lifetime beneficiary lives. However, it is important that your trustees ensure they are complying with all the legal and tax requirements of your trust arrangement. With this in mind, it is equally important that you ensure you appoint suitable trustees.

Before making a will with a life interest trust, you should always seek professional advice as to the various implications. Similarly, if you are the trustee of a life interest trust, you should seek advice to ensure that you are always acting within your remit.

Life interest trusts are a popular and effective way of ensuring your estate passes exactly as you wish, but you must make sure that the type of life interest trust you desire is, and the trustees you intend to appoint are, appropriate.

Our solicitors can advise you on creating a life interest trust in a way that ensures your choices are clear and legally binding, as well as advising you or your trustees as to the requirements of managing a life interest trust.

For further information, please contact Tony Calwell  in the wills and probate team on 0117 9390350  or email [email protected] .  Watkins Solicitors has offices in Bristol ( Fishponds  &  Southville ),  Bath and Hereford .

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.

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A person with life interest in a property can’t always sell it

A person with life interest generally does not have the right to sell or transfer property to the detriment of absolute owner A Will has to be read as a whole and isolated clauses of the Will should not be relied upon for ascertaining the true and correct intention of the testator

My father died nearly four years ago and I am a legatee along with my mother. The clause of the Will is that “I bequeath property to my wife for her life absolutely and, thereafter, to my son", to the exclusion of all. Is it possible for my mother to alienate the property by sale? Please advise.

—Name withheld on request

The general principle is that the document should be read as a whole, and it is the substance of the document that matters and not the form or the nomenclature the parties have adopted. As has been held by various high courts, including the Supreme Court, a Will has to be read as a whole and isolated clauses of the Will should not be relied upon for ascertaining the true and correct intention of the testator.

However, based on the information you have provided, it appears that your mother, the widow of the deceased testator, has been given a life interest in the property by your late father, which is limited to her enjoyment during her life time. A person with life interest generally (as we have not perused the Will) does not have the right to sell, transfer or alienate the property to the detriment of the absolute owner, which in your case is the son, i.e., you. It is a limited right to enjoy the property up to the death of the life holder.

You may refer to the Supreme Court judgment dated 12 December 2017 in the matter of Ranvir Dewan versus Rashmi Khanna & Ors. [(2018) 12 SCC 1], wherein it is explained that a life interest is a “restricted estate" which automatically ends upon the death of the life interest holder. It was inter-alia held that when a Hindu male validly disposes off his property by providing for a limited estate to his heir, i.e. to his wife, the wife or widow has to take it as a limited right. This limited right of life interest is not enlarged even by virtue of certain provisions under the Hindu Succession Act, 1956 . What the Supreme Court meant is that conferment of a limited estate which is otherwise valid in law is reinforced by this Act. To clarify, the Supreme Court reinforces the view that a limited interest is incapable of being transferred by the life interest holder to others, being personal in nature, and ultimately it vests in the heirs of the testators absolutely and completely and, therefore, the heirs on account of being the ultimate beneficiaries were permitted to get their names mutated in the municipal records as absolute owners.

I am 38 years old. My brother (who is 52) wants to transfer one of his properties in my name. What should I keep in mind so that the same doesn’t get challenged at a later date by his wife or children?

We have assumed that you are a Hindu and laws applicable to a Hindu apply to you.

We have further assumed that the property that your brother wishes to transfer to you is his self-acquired property and he is the absolute owner of the said property. In that case, we suggest that instead of a testamentary disposition i.e. a transfer by Will, your brother executes a transfer deed , in the nature of a gift deed , during his lifetime. Since under the gift deed it is mandatory to have two witnesses, you may request your brother to make his wife and children (if adults) to witness the execution and registration of the gift deed relating to the transfer in your favour. This would amply protect you in the future and there will be no chance of a dispute at a later date.

Also, such a gift deed will have to be registered and requisite stamp duty , as may be applicable, will have to be paid.

Aradhana Bhansali is partner, Rajani Associates

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What Is a Life Estate?

Understanding a life estate, life insurance as an income stream, how to create a life estate.

• Alternatives

Life Estate and Medicaid

• Advantages and Disadvantages

Life Estate vs. Irrevocable Trust

• Life Estate FAQs

The Bottom Line

• Trust & Estate Planning

Investopedia contributors come from a range of backgrounds, and over 24 years there have been thousands of expert writers and editors who have contributed.

A life estate is a property—usually a residence—that an individual owns and may use for the duration of their lifetime. Called the life tenant, this person shares ownership of the property with a second person. The second person is called the remainderman and automatically receives the title to the property upon the life tenant's death.

In the U.S., homeowners most often create life estates to ensure that the next generation eventually gets the family home while avoiding probate, the legal process of proving a will.

Key Takeaways

• A life estate is a type of legal joint property ownership.
• Under a life estate, the owners have the right to use the property for life.
• Typically, the life estate process is adopted to streamline inheritance while avoiding probate.
• The life tenant retains all the rights and responsibilities of an owner except the right to sell or mortgage the property.

A life estate is a form of joint homeownership. Ownership is shared between a life tenant and a so-called "remainderman." As the name suggests, the remainderman has an ownership interest but cannot take possession until the life tenant's death. The life tenant may live in the home but may not sell it or mortgage it without the agreement of the remainderman.

The life estate is established with a deed that states that the occupant(s) of the property is allowed to use it for the duration of their lives. The deed will also name the person who will receive the property after the life tenant's death. 

In France, a homebuyer can arrange a life tenancy with an elderly homeowner and pay that person a regular income in return for being named as the designated remainderman. This is called a viager .

Within a life estate, the life estate deed is a document that grants the owner the ability to pass on ownership of a property without including it in a will as part of a person's assets. As a result, the property does not have to go through probate —the court process used to validate wills. The probate process can be costly and complicated when the estate is very substantial or unusually complex.

If there is a life estate, the life tenant's interest in the property ends at death, and ownership is transferred to the remainderman. The life tenant is the property owner for life and is responsible for costs such as property taxes, insurance, and maintenance. Additionally, the life tenant also retains any tax benefits of homeownership.

While a life estate is usually created to streamline the transfer of homeownership to the next generation, it can also be used to establish an income stream.

Life estates can be created to provide a life-long income for a person rather than a lump-sum inheritance. In this case, the estate consists of money invested in income-producing instruments, such as bonds, oil and gas leases, real estate investment trusts (REITs), and other similar investments. Under this arrangement, the life tenant receives income for life, but they cannot access the principal amount.

No matter what type of property is involved in a life estate, the life tenant cannot sell it or borrow money against it without the agreement of the remainderman. If both agree to the sale, the remainderman could demand a portion of the proceeds based on a predetermined scale that reflects the life tenant’s age and current interest rates. Typically, the older the life tenant, the greater the share the remainderman can expect to receive.

Once you've considered creating a life estate and have decided it's what you need, there are only a few steps:

• Consult an attorney : An attorney can help you finalize your decision and become more familiar with the estate laws in your area.
• Draft your life estate deed : It is possible to draft the deed yourself, but you're better off hiring an attorney to do it for you so there are no errors, mistakes, or omissions.
• Record your life estate deed : Take your deed to the county clerk or recorder's office. It needs to be filed with the county to be valid.

Alternatives to a Life Estate

A life estate is an excellent tool for securing your assets to pass to your beneficiaries and bypass lengthy probate, but it isn't the only option available. You can also create a:

• Transfer-on-death-deed : This deed passes on real estate to your heirs after your death. You can change this deed anytime, making it a flexible alternative to a life estate.
• Revocable living trust : You place the assets in this trust to protect them from creditors and probate. It can also be revoked or changed and is another flexible alternative to a life estate.
• Irrevocable living trust : As the name implies, you place your estate in this trust and cannot revoke it. Once the assets are in it, you no longer "own" them and cannot change the terms of the trust unless a court rules in your favor.

Medicaid is a state program that ensures people who need to move into a long-term care facility can receive the care. To qualify for Medicaid, you cannot own more than your state allows unless under specific conditions. Medicaid also seeks reimbursement after you die from any estate you may have left.

Medicaid commonly targets a recipient's house because it is generally their most valuable asset. For example, it might place a lien on the house or try to force a sale to recoup the cost of your long-term care.

Under a life estate, the home is no longer an asset of the individual's estate. That shields it from lawsuits, including Medicaid estate recovery.

Types of Life Estates

There are two types of life estates—traditional and enhanced. The enhanced version is typically called a "Lady Bird" deed, commonly thought to have originated when President Johnson transferred property to his wife, Lady Bird Johnson, when he died. However, the practice is much older than that.

The enhanced version differs from the traditional only in that the life tenant can sell the property or take out a mortgage against it without the remainderman's consent, and that it can be revoked.

Advantages and Disadvantages of Life Estates

Life estates carry both advantages and disadvantages. The most notable advantage of the life estate is that it simplifies the transfer of a home to the next generation. If the home is included in the homeowner's will, the probate process may delay the transfer. If there is a life estate, the transfer is automatic when a death certificate is filed.

One other potential advantage: the home is no longer an asset of the estate. If a person is enrolled in Medicaid and receives services paid by it, state governments may sue the estate to recover the costs. A life estate protects it from "Medicaid estate recovery."

In addition to legal benefits, there are potential tax benefits:

• The life tenant may be eligible for some homestead or senior tax breaks as a homeowner.
• The remainderman may receive a substantial capital gains tax break when and if the house is sold (since its tax valuation will be based on its value at the time of the life tenant's death, not at the time it was purchased by the life tenant).

However, there is a potential legal disadvantage as well: the life tenant may become involved in any legal problems that a remainderman incurs. For example, if a parent and a child have created a life estate and the child is sued for nonpayment of taxes, a lien could be filed against the parent’s home. 

In any case, creating a life estate is a serious and binding decision for a homeowner. They are giving up the option of selling or mortgaging the home (unless the remainderman agrees) and making an irrevocable choice of an heir to the house.

Simplifies the transfer of a home to the next generation

Protects the home from debtors of the deceased

Allows older homeowners to retain the benefits of home ownership

Makes the owner vulnerable to debt actions brought against the remainderman

Can't be undone easily if the owner's plans or circumstances change

Restricts owner's ability to mortgage or sell property

Like a life estate, an irrevocable trust is often a tool for estate planning. As in a life estate, the irrevocable trust removes assets from the grantor's estate. Specifically, the grantor relinquishes all rights to some assets and income, transferring them to a trust. The assets may be cash, investments, or life insurance policies. The trust's beneficiary may be a spouse, the grantor's children, or a charitable organization.

A life estate is also "irrevocable." Once a life estate deed is filed, the life tenant cannot alter the agreement without the consent of the remainderman.

An irrevocable trust does have its uses, however. A trust can reduce a person's wealth on paper while transferring that wealth to family members. It also removes some of the person's assets from an estate, eliminating them from the probate process.

A trust can be a valuable strategy for a professional vulnerable to lawsuits—such as a physician—because it protects some of their assets by transferring them to family members under a trust.

Unlike a life estate, a trust may not provide a benefit, such as a residence, to the grantor.

Example of a Life Estate

A life estate agreement is usually undertaken as an aspect of estate planning. For example, an older couple might consider a life estate arrangement as an alternative to naming a beneficiary in their wills. A life estate agreement gives them the right to stay in their home for the rest of their lives. Then, when they are both deceased, an adult child or children will automatically take title to the property.

A widowed homeowner who can no longer live alone might create a life estate agreement with an adult child as the remainderman. The parent and child now co-own the home, but the parent retains lifetime rights to use the home. Both assure that home ownership will pass to the child without delay or interruption.

What Is a Life Estate for Dummies?

A life estate is a legal document that splits ownership of property, so that the first party retains rights to use the property and the second party retains rights to inherit it.

What Are the Disadvantages of a Life Estate?

If you have a life estate on a property, you cannot refinance, sell, or alter it without the remainderman's (the second party) permission.

Who Pays the Inheritance Tax When the Life Tenant Dies?

If an estate is subject to an inheritance tax, the life tenant's estate is responsible for paying the tax.

Who Owns the Property in a Life Estate?

The property is owned by all designated parties in a life estate deed. However, the life tenant retains the right to occupy the estate.

Creating a life estate is a reasonable way for homeowners to ensure that their home will be passed on to the person they want it to be, with minimal legal fuss or delay. However, a life estate should only be established with the full understanding that it can't be undone easily. The homeowner is giving up the right to sell the property or get a mortgage on it without the cooperation of the remainderman.

State Bar of Michigan. " Ladybird Deeds ," Page 30.

Medicaid. " Estate Recovery ."

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A Guide to Help You Understand What “Life Interest” Means

• December 31, 2021
• goprimeconsult
• Uncategorized

One of the biggest challenges about writing your trust or will is understanding all the terms and meanings involved. It can be a pretty intimidating process. Of course, that doesn’t mean you should delay drafting a trust for this reason. One of the things that people often get confused about is life interest.

What is it? What is it for? Today we’re going to discuss all of that to help you better understand.

Here’s what you need to know:

What Exactly is a Life Interest?

A life interest is a person’s right to enjoy the specified property for the rest of their life. The property cannot be disposed of or sold without their consent during their lifetime.

When is it Used?

A life interest is often used when a person transfers property to someone else, but they will still benefit from the income it generates or its use during their lifetime. An example of this is if you’re transferring your house to your child, but you’ll still be living in it for the rest of your life.

The Purpose of a Life Interest

A life interest can be created for several purposes, but the most common is to allow the grantor to use the property during the grantee’s lifetime. The grantor may use the income it generates or the property itself. If the grantor is still living when the grantee dies, the grantee’s interest ends, and the property reverts to the grantor.

Giving someone a life interest is a great way to receive a gift. It gives them the immediate enjoyment of the property, but it also leaves the property with the grantor in the case of their death. This can be appealing to people who would otherwise be unwilling to sell the property. Many people prefer to keep the property in the family in this way.

How to Create a Life Interest

A trust is an excellent way to create a life interest, but it’s not the only way. There are other ways, but it is essential to consult a lawyer.

The following is a sample of the life interest clause of a trust:

“I, Jake Gray, hereby give a life interest in the following property to my son, Billy Gray. He shall have the right to live in the house and use the income from it for life after my death. If he outlives me, the property shall revert to myself and my estate.”

This is only a sample. This must be done in a trust because it is a legal document.

How to Modify or Terminate a Life Interest

It’s possible to modify or terminate a life interest. However, this must be done within the power granted by the document. If not, it could be considered invalid.

If someone who has a life interest wants to sell the property, they have a right to do so. However, they must obtain the consent of the beneficiaries of the trust to do so. If a life interest is granted to a person and their spouse, the right to sell the property may be granted to both of them.

If a trust exists that contains a life interest, the trust would have to be amended or terminated if the parties decide to sell the property. A competent trustee can do this.

The Bottom Line

A life interest is a common way to transfer property to someone else. It allows them to enjoy the property for life, but it remains in the hands of the grantor. This is why it is an excellent way to leave the property in the family’s hands. Keep in mind that there are other legal means to transfer property to someone.

It’s essential to seek the advice of a lawyer to ensure that your trust or will meet your desires and the federal and state laws that apply.

If you are looking for an experienced and reliable estate lawyer , we can help you. Ontario Wills & Estate Plans is a law firm based in Ontario that serves Canada. Our services are available through video conferencing. Get quality legal advice from the best Ontario lawyers. Contact us today to learn more about our services!

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Who owns the property when there is a life estate?

An ownership interest in real property is a combination of a bundle of different rights, the rights to possession, use, transfer, encumber and exclude. A life estate is a type of joint ownership of real property with ownership “split” between a present interest and a remainder interest. The individual holding the life estate – the life tenant retains the legal right to possess and use the property during their lifetime. Upon the death of the life tenant, the property passes to the person or person who hold the remainder interest – without the need for probate. At that point, the remainderman assumes all property rights and obligations. The remainderman then gets the entire bundle of real property rights.

A life estate is usually created through a deed, but can be created in a Will or a trust. For example, Husband’s Will may leave a vacation home to his spouse for her lifetime and to his children upon her death. Alternatively, an owner can execute a deed transferring the property to a third party and retain a life estate on the face of the deed.

The life tenant is entitled to all rents and profits during their lifetime.  The life tenant must maintain and pay costs on the property, including property taxes and upkeep. The remainderman has no right to use the property or collect any income generated by the property while the life tenant is still living. The remainderman does however have an interest in ensuring that the life tenant does not damage the property or diminish its value.

A life tenant does not have complete control over the property because they do not own the whole bundle of rights. The life tenant cannot sell, mortgage or in any way transfer or encumber the property. If either party wants to sell the property, both the life tenant and remainderman must agree. The life tenant usually receives a smaller portion based on the value of the life estate, calculated using  actuarial tables .

These split interests therefore can be valued. The owner holding the remainder interest, you have a right to bequeath the remainder interest by the terms of your will; or you can sell or give away the remainder interest during your lifetime.

The transfer of real property subject to a life estate is a tactical estate planning tool used to avoid the probate of real property after death. A life estate can also protect real property from certain creditors. Medicaid cannot put a lien on real property when the recipient only has a life estate because a life estate is not a probate asset.  Therefore,  Medicaid cannot recover  from a Medicaid recipient’s estate for the cost of services rendered.

Life estates can be valuable options for clients seeking to simplify their estate planning. However, there are pitfalls. It is wise to discuss whether this option is suitable for your specific estate plan with an experienced  estate planning attorney .

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What is a Life Interest Trust?

Life interest trust of family home on death 

Where a property is owned jointly, it is worth considering whether you should create a life interest trust on the death of the first joint owner. This would normally be set out in your will. This note explains how that can be done and the advantages and disadvantages.

Although we have referred to the spouse below, these provisions apply equally to un-married couples and those in a Civil Partnership. Although the term property can apply to any asset, for the purposes of this note it’s meant to refer to the house or flat you live in.

What is a life interest trust of property?

Put simply, the beneficiary has the use of the property during their life time but on their death it passes to a third party; e.g. A house is left to a spouse to live in during their lifetime but on their death the houses passes to children.

In the above case the spouse can’t leave the property in their will as their interest ends on their death.

In order to create such a trust of your family home it will be necessary to hold the property as tenants in common.  This means both parties own 50% each.  You then give your spouse a life interest in your half share in your will.  When one of you dies the survivor inherits a life interest in the others 50%.  They can continue to live in the whole house for the rest of their life but only own half of it.  If they wish they can sell the house and buy another one so long as they preserve half the underlying capital in the new property.

Advantages of creating a life interest

Creating a life interest means you control the ultimate destination of your property. The surviving spouse has a home to live in but the first spouse to die can be sure that at least half of the house will ultimately pass to the children, or other beneficiaries.  Their half of the property cannot be used to pay care home fees.  If the survivor decided to go on a spending spree, or remarried or went into care then another party could spend or inherit only their half of the house etc.

This can be a useful way of avoiding all of your assets going in care home fees and addressing the conflicting issues which arise on a second marriage.  A new spouse can continue to live in the house, but on the death of the original surviving spouse the half share in the property passes to children or other beneficiaries.

Creating such a trust doesn’t save any Inheritance tax . As we explain below. Its two main advantages are:

• Avoiding all of your property going in nursing home fees
• Ensuring that if you die first you can be sure who will inherit your property

Disadvantages of creating a life interest

On the death of the first spouse, the survivor doesn’t inherit the deceased’s share of the house outright; they only have the right to live in it. While this may not be a problem in later life it can be if one of the joint owners dies at a young age. For many couples their house can be the main asset they own.  Only having access to half its capital value can be a significant issue. A life interest gives a right of occupation and a right to any income, if for example the property was rented out.  The surviving spouse can normally move home and use the deceased spouse’s share to buy another property provided there isn’t a loss in value.  What the survivor can’t do is spend the deceased spouse’s share of capital.

While many people would prefer not to paying nursing home fees, the fact you don’t have access to all of your capital may affect the kind of care home you can afford to live.

Joint tenants and tenants in common

Property can be owned in one of two ways:

Joint tenants

The property belongs to you jointly and on the death of one spouse it automatically passes to the survivor. You cannot leave jointly owned property in your will. To create a life interest under your will you need to hold the property as tenants in common.

Tenants in common

You both have a distinct share in the property which you can leave in your will.

Severance of a joint tenancy

You can sever a joint tenancy and hold the property as tenants in common by service of a notice of severance and registering it at the Land Registry.

Inheritance tax (IHT)

This is generally only an issue if your combined estate is worth more than £650,000.  In calculating this sum you must include any property you have given away in the previous seven years over and above the sum of £3,000 per annum.  You must also include property you have given away but continue to use i.e. a holiday home.

You may also qualify for the Residential Nil Rate Band, which by 2021 can increase your join IHT allowance to £1,000,000.  However not all people will qualify for this additional allowance and therefore for the purposes of this note we have disregarded it. We will be happy to discuss with you whether or not you qualify for it.

If you have not given any assets away and your estate is less than £650,000 you can ignore this section.

Where Inheritance tax is payable, the surviving spouse is treated as owning the whole property for Inheritance tax purposes . This can be more of an issue for un-married couples who don’t have the benefit of the spouse exemption and transferrable nil rate band.  If the spouse or un-married partner had inherited the whole property then similar Inheritance tax principles would have applied and therefore creating a life interest is generally tax neutral.  If Inheritance tax is payable, its born pro rata between the trust and the second spouse’s estate.

  Example A and B are married. On A’s death B inherits a life interest in A’s half of the house.  On B’s death the house is worth £600,000 and B has savings of £300,000. B is treated for Inheritance tax purposes as having an estate of £900,000.   B’s actual estate is half the house £300,000 + the £300,000 = £600,000   The trust which holds the life interest has half the house £300,000. So 2/3 of any tax due would be payable by B’s estate and the trust would pay 1/3.  This tax is payable from the half share of the house held in trust

This is general advice and is meant for information purposes only.  It should not be relied upon and specific advice should be obtained on any legal problem

Life Interest Trust  for the recent article by Nigel George on Let’s Talk Business

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What is a life interest trust and how can it help?

Complicated family situations and second marriages can raise concerns over what may become of your assets after your death, for example if a spouse remarries after divorce or death . A life interest trust may be the solution to keeping everyone (relatively) happy.

A common dilemma

A common dilemma for many individuals is how to secure the future for both their spouse and children after their death. This is particularly the case for those with children from previous relationships who want to look after their new spouse or partner whilst also ensuring their assets are preserved for their children, or other loved ones.

These concerns are not exclusive to those in second marriages and are common amongst those who believe that a spouse or partner may remarry or form another relationship after their death or that they may depart from their agreement as to how the assets should be divided on the second death.

We have encountered many situations where a surviving spouse (often on a second marriage), having been bequeathed the deceased spouse’s entire estate, subsequently makes a new will excluding the deceased’s children altogether or remarries, upon which the old will is revoked.

A solution for modern families

A life interest trust is an arrangement which ensures that one or more beneficiaries can enjoy the use of trust property for a period of time (usually their lifetime). Taking an example of a house, the beneficiary (usually the spouse) can live in the property for their lifetime, or be given the entitlement to receive the rental income from it for their lifetime.

Rather than leaving assets outright to someone, the assets are left to trustees who will hold the assets in trust for the benefit of the lifetime beneficiary e.g. the spouse or partner. The trustees will then pass the asset in question to the children or other named beneficiaries on the death of the spouse.

Unlike the situation where the assets are left outright to the surviving spouse who can do what they want with the assets after your death, the assets are preserved for the next generation whilst at the same benefiting the surviving spouse.

This arrangement is very often put in place for those in second marriages who want to ensure that their spouse has a roof over their head but that ultimately the children will receive the benefit of the assets concerned after their spouse’s death. The arrangement is not exclusive to those in second marriages and is commonly used by couples who want to put arrangements in place now to protect their families in the future.

Asset protection 

Another situation where they can be used is where someone does not want their assets to pass outright to a child (or someone else) for certain reasons, for example the child may be irresponsible with money or have financial or marital problems. If the assets were left to the child outright, the capital could be exposed to risk or depleted. A life interest trust can ensure that the child has the right to enjoy the benefit of the property for their lifetime (for example the right to live in a house) whilst ensuring the property is also preserved for the next generation, as the trustees will have ultimate control over it.

Provision can even be made for the life interest to cease on the happening of certain events such as bankruptcy thereby protecting not only the capital but also the income from the trust.

Flexible arrangements

Trust arrangements can be tailored to your own individual family circumstances and can be flexibly drafted so as to ensure that the trustees can adapt to changing circumstances. Life interest trusts can be created so they take effect during your lifetime or instead on your death. They can be drafted so as to allow your appointed trustees to pay or lend money to the beneficiaries during their lifetime should the need arise. They can also be drafted so as to bring the trust to an end in certain circumstances for example on the remarriage of the spouse or if the spouse no longer needs the property in question.

What assets can be put in trust?

Any type of assets can be put in trust but typically cash, investments or property are transferred to such trusts. Common examples are:

A house will be left to a beneficiary with a right to occupy the house during his/her lifetime. The trust can be drafted so as to give the trustees the right to sell the property and purchase a replacement property for the life tenant, so that the trust transfers to the new property.

Shares in a family company. You may be faced with the dilemma of wanting a family member to receive an income from the company but have concerns that they may not be able to run the company or fear they may sell it. Many people choose to leave their shares to trustees so that that their loved ones can enjoy the dividends from the shares but the shares and the accompanying voting rights and possible control of the company is left in the hands of trustees.

Farms are sometimes put in trust so that the surviving spouse or children have the immediate benefit from the farm but on their death it passes to the next generation.

Who should be the trustees?

It is important to choose your trustees wisely and whom you choose will depend on your own personal circumstances.

When settling their assets on trust many couples want to give the surviving spouse some say in how the trust is run and will appoint the surviving spouse as one of the trustees together with the children. This has the advantage of ensuring that the surviving spouse has some say but the disadvantage is that neither of the trustees can be said to be independent and their interests may collide. Sometimes there may even be a family dispute which may lead to a dead lock situation where the trustees cannot agree.

There is a lot to be said for choosing trustees who are independent of the beneficiaries. However that may not be practical for many people who would prefer to keep control within the family.

Taxation implications

There will be different tax implications depending on the type of asset being transferred to the trust and on the relationship between the person creating the trust and the beneficiaries and specialist advice should be sought.

If you would like to further advice on lifetime trusts please contact one of our specialist solicitors  Claire Tuohy .

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