A client’s financial circumstances are all as unique as they are. Assets are structured in different ways for a variety of reasons, and it’s not unusual for a property to be legally registered in one person’s name, even though multiple people live there and contribute financially to the property. What happens though if the legal owner dies? What happens to the people still living in the property?
A very common scenario is where a client has remarried and owned a house, possibly from their first marriage. They then live in this house with their second partner. They want to ensure that their second partner can remain living in the property, but would like to gift the capital value of the property to their children from an earlier relationship. It is possible to encapsulate this situation via Will through two legal mechanisms, called a life estate or a right of residence.
This situation is very relevant to blended families, but is as equally applicable to all kinds of relationships, including parents and adult children, siblings and friends. You may, for example, have one child living with you, who you would like to see ‘get on their feet’ after your death before your estate is divided equally between all your children. The University of Sydney is scheduled to receive millions of dollars after a life estate has expired 49 years after the death of the initial testator or Will-maker. The deceased’s sister, who died at the age of 101, was permitted to reside in the deceased’s Mosman property and on her death, the property was gifted to the University.
What is a right to reside?
A right of residence permits your loved one to reside in the property for a specified period, which is determined by you in your Will. Frequently, this is for the life of your loved one, but can be shorter or until a certain event happens, e.g. marriage or entering into a new de facto relationship.
The testator can specify conditions that have to be met by the loved one residing in the property. These include maintaining the property and paying expenses, such as rates and insurances.
The testator can also direct that the property can be sold, and new property purchased with the sale proceeds, subject to the same conditions. The benefit of this to the person residing in the property is that they can exercise the right for life even though they may need to downsize, or move into a care facility and pay an accommodation bond, even though that asset won’t make capital gains.
When the right of residence ends, the property is then dealt with under the terms of Will. This would normally see the property being sold and proceeds distributed to the remainder beneficiaries.
What is a life estate?
A life estate is similar to a right of residence, but it gives the person living in the property more power and rights in respect of the property. It essentially permits that person to live in the property without interference. They are known as the life tenant.
A life estate can be registered on the title to the property, which means the property cannot be sold without the life tenant’s knowledge and consent.
A life estate doesn’t require the life tenant to live in the property for the duration of the interest. This would entitle the life tenant to move out, tenant the property and retain the rental profits.
A testator can also provide directions about the property being sold and proceeds used for the acquisition of new property for the benefit of the life tenant.
When a life estate comes to an end, normally on the death of the life tenant, the property is again dealt with under the terms of the testator’s Will.
Why should I set up a right of residence or life estate in my Will?
If your Will does not adequately provide for your loved ones, this can lead to difficult and stressful litigation called Family Provision proceedings, heard in the Supreme Court of New South Wales. This is a specialised area of law and can be costly for your loved ones, both financially and emotionally.
These interests are only relevant in circumstances where you want to ensure a loved one has somewhere to live, but you want to gift your property to someone else. They are a mechanism which permits a testator to address the needs and wishes of multiple groups of people.
If you live with a partner who legally owns your home, it is worthwhile talking to them about the issue. They may want to gift their estate to their children, but haven’t thought through the fact that this would leave you homeless.