Is a Life Estate the Right Choice in Your Estate Planning?

A life estate can play a useful role in estate planning. However, there are drawbacks that need careful assessment when considering whether one would be right for you.

Life estates

A life estate refers to the ownership of an asset for the duration of a person’s life.

What is a life tenant, and when are life estates used?

The “life tenant” has the right to the possession, enjoyment and income of an asset until death. Ownership then reverts to a person known as the “remainderman”. Where a property is concerned, the life tenant has the right to occupy and use the property.

Life estates, created by a Will, are often used in blended families. They can be used, for example, to ensure a deceased’s property eventually goes to any children from a previous marriage while allowing the spouse at the time of death to have some benefit from the use of the property.

Potential drawbacks of life estates

One issue is that the creation of a life estate may not provide adequate provision for the surviving partner’s proper maintenance and support.  In such circumstances, the life tenant may contest the life estate by bringing a family provision claim under the Succession Act 2006.

Difficulties can also arise if the relationship between the life tenant and remainderman is not amicable. For example, the children will have no ability to deal with the property until the death of the spouse unless they can come to an agreement to sell the property to a third party.

In some cases, Crisp Orders can provide some flexibility for the Court when parties are seeking to negotiate or settle a disputed Will. The order can allow an applicant to continue living in a property until such time they wish to move and provide some funds to find somewhere else to live.

Crisp Orders

Under such a Crisp Order, the applicant receives a “portable life interest” in a property. This might be the deceased’s former home, along with the right for that property to be sold. The proceeds of the sale can be used to provide suitable alternative accommodation, such as at a care home, for the applicant sometime in the future.

Once the applicant themselves dies, the balance of the interest is distributed to the beneficiaries in accordance with the Will or any other order that may have been made by the Court.

Illustrative case: Ng v Lau; In the Estate of Ken Lau (2020) NSWSC 713 

The recent case of Ng v Lau illustrates many of the issues with life estates. The case involved a widow and a conflict between two Wills, one of which may have been made in “suspicious circumstances”.

Facts of the case

Mr Lau died in 2018, leaving his second wife, Mary Lau, and son, Gary Lau. He had made a Will in 2001 and another secretively in 2016. Among the estate assets were two Sydney properties, one Peakhurst, which was left to his son, and another in Bexley. In the 2001 Will, Mrs Lau was entitled to receive ownership of the Bexley property, whereas in the 2016 Will, she was only to receive a life interest which would eventually revert to the son. Mrs Lau questioned whether her husband understood the implications of a life estate.

What did the Court consider?

The Court considered which Will represented Mr Lau’s true testamentary intentions and whether the 2016 Will was created in suspicious circumstances. The Court considered that a failure to discuss the new Will was “not necessarily a cause for suspicion,” especially when the “change might excite disagreement” and provoke an argument.

The Court was satisfied that the deceased’s 2016 Will was valid and they felt that, on the evidence, especially the solicitor’s contemporaneous detailed file note, Mr Lau was “clearly cognisant” of his actions and the potential impact on his surviving family members.

Additional provision from the estate

With the 2016 Will confirmed as valid, Mrs Lau sought additional provision from the estate as the life interest alone was insufficient for the “proper maintenance, education or advancement in life”.

Mrs Lau was 74 years of age and had been married for 17 years. The Court noted that Mrs Lau needed some flexibility to allow her to move from the matrimonial home as she aged. A life interest in the Bexley property did not address the fact she would need to move within a few years, and the life interest did not provide the necessary flexibility.  As a result, the Court acknowledged that a life estate represented inadequate provision for her.

Grant a Crisp Order

It was noted that the property had a value of approximately $1m and that alternative accommodation might cost up to $800000. The Court decided that “the least violence” to Mr Lau’s wishes would be to grant the widow the benefit of a Crisp Order, together with a payment of $45000 for contingencies and expenses for repairs to the home while she lived there.

The Crisp Order would allow her the ability to move accommodation when she needed to. To assist her in this, the Court ordered, as volunteered by Gary Lau, that he would resign as co-executor, allowing her to continue as sole executor.

Is a life estate the right choice?

Once a property is subject to a life tenancy, the tenant and remainderman must work together if anything is to be done with the property. Issues can arise if the tenant needs agreement to sell the property or if the tenant cannot afford to maintain the property.

The illustrated case also demonstrates how important it is to consider beneficiaries' future needs when drafting a Will and informing the beneficiaries of any changes to the Will can help prevent claims of suspicious circumstances.  The drafting lawyer’s contemporaneous notes were critical to the illustrated case's outcome, demonstrating a further drawback to self-drawn Wills.

Life estates can be the right choice for some families but not others. We can help you make an informed choice.

Contact our Wills and Estates Lawyers in Sydney, NSW

If you are interested in creating a life estate is important that you talk to a specialist in Wills and Estates. At Szabo & Associates Solicitors, we can assist you with all matters relating to Wills, Estate Planning and, where necessary, contesting a Will. Please call us on 02 9281 5088 or fill in the online contact form.