Figuring out the best way to ensure your loved ones are cared for when you’re gone can be tricky. If you’re reading this, you’re thinking about estate planning, which is a great step to ensuring your wealth and family are protected .
Two options our estate planning lawyers often discuss with clients are a Right to Occupy and Life Interest. Both enable control over the distribution of a property through a will, rather than leaving it as an outright gift to a beneficiary. And while they’re similar, there are key differences to consider, so let's break down Life Interests vs Rights to Occupy!
What is a Right to Occupy?
Think of it as "living rent-free". The beneficiary (a Life Tenant) can reside in the property for their lifetime, but they don't own it. The Right to Occupy will have a specific endpoint, such as the death of the tenant, a certain period of time, or if the tenant decides to remarry.
Importantly, the Life Tenant doesn’t have the right to gift or assign the rights in the property to anyone else. When the right to occupy ends, the property goes to the “remaindermen” or the beneficiaries named in the Will.
What is a Life Interest?
A life interest is more like "partial ownership” whereby the Life Tenant gets full ownership rights over the property but cannot leave the property to someone else when they die. In other words, the beneficiary gets the rights to possession and enjoyment of the property, including renting it out for income, but the ultimate beneficiary of the property (the remaindermen) receives the title upon the termination of the Life Interest.
For example, in a blended family with step-children, the Life Tenant would usually be the deceased’s spouse, and the children of the deceased spouse would be the remaindermen.
Pros and Cons of a Right to Occupy
We’ve covered the benefits of including a Right to Occupy in your will over here. Now let’s look at the potential downsides.
- No income generation (ie. renting out the property is not allowed).
- Any mortgage against the property should be paid off so as not to unintentionally create any equitable interest.
- Ongoing costs must be paid either by the life tenant or the estate. If there aren’t enough funds in the estate or the life tenant cannot afford the costs, tensions can arise between the ultimate beneficiaries and the life tenant.
- If a will doesn't leave any money or other benefits for the ‘life tenant’ of the property, that person could potentially contest the will . They’d argue that the will didn't give them enough financial support, considering their relationship to the deceased and their own needs.
Benefits of a Life Interest
Including a Life Interest in your will provides financial security through income generation, and you can even specify how the property is managed. The modern family dynamic is more and more commonly comprised of step-children and a life interest can ensure that each spouse’s respective children ultimately end up with the benefit of their parent’s estate.
Important Considerations Around Life Interests Include:
- Tax issues such as income tax and capital gains tax consequences must be considered for the estate and the tenant.
- Similar to the disadvantages of a right to occupy, if there’s no other provision for the life tenant in the will, this can lead to a potential testator’s family maintenance claim against the estate, if it’s deemed to be insufficient provision for the life tenant.
- Any mortgage against the property should be paid off so as not to create any equitable interests.
- Ongoing costs must be paid either by the life tenant or the estate. Cost factors can lead to tensions between the ultimate beneficiaries and the life tenant.
Can you Sell a Property With a Life Interest?
As estate planning lawyers, we get asked this a lot. Selling a property with a Life Interest is possible, but it depends on various factors like the specific terms of your Life Interest, the type of Life Interest you hold, and the agreement with the remainderman (the person who ultimately inherits the property). Seeking legal and tax advice is crucial before proceeding with any sale.
Right to Occupy vs Life Interest: Which is Right for You?
We’ve covered both in detail, but choosing the right one to include in your will depends on your specific goals and unique family circumstances. Consider these 3 things:
Who do you want to benefit?
A spouse might prefer a Life Interest for income, whilst a child might be better off with a Right to Occupy for stability. Making a call here will depend on the overall size of the estate, the age of the children, the income and assets of the remaining spouse and many other factors unique to your situation.
What are your asset protection needs?
Both a well-drafted Right of Occupancy and Life Interest can provide asset protection over the property so that your asset does not end up in the hands of creditors or future ex-partners. Any decision here will depend on your unique situation.
Do you want to allow income generation?
A Life Interest allows renting, while a Right to Occupy does not, so this is a pretty straightforward decision depending on your family’s situation.
Talk to our Estate Planning Lawyers about Life Interests and Rights to Occupy in Your Will
Don't leave your loved ones guessing! By understanding the differences between a Right to Occupy and Life Interest, you can make an informed decision that best suits your family's needs.
Both options can be complicated and give rise to risk and complex legal issues which must be considered. Consulting an estate planning lawyer will clarify the nuances and ensure everything aligns with your wishes in a water-tight will. Get in touch with our estate planning lawyers to discuss your strategy.
