In navigating the world of estate planning, you may have come across something called a life interest.
A life interest is a kind of trust. As a refresher, a trust is a three-way legal arrangement that splits the ownership of a property - the settlor establishes the trust, giving just the bare ability to own and manage the property to the trustee, and indicating that the property is to benefit or be for the use of a beneficiary.
A life interest is a trust with a bit of a twist - there are at least two beneficiaries. In the classic example of two - one can benefit from or use the property over the course of his or her lifetime, and the other receives the property or the remainder of it after the first beneficiary passes on.
These beneficiaries are called the income beneficiary and capital beneficiary respectively.
Due to its dual nature, a life interest can be a fantastic tool for helping family members meet long and short term needs. It can also provide a tool for compromising on an inheritance by sharing the value of a single asset among multiple beneficiaries.
The income beneficiary, also called the life tenant, will have access to use, benefit from, or profit from the assets in the trust for the duration of her or his lifetime, unless otherwise stipulated in the trust agreement. However, the life tenant is not granted access to the initial investment or deposit made in the trust, or if the trust pertains to real estate, cannot sell the property. At the end of the life of the life tenant, the asset will be passed on to the capital beneficiary, also called the remainderman. [I know, archaic language!]
In some cases, the life tenant may also be the settlor - or initiator - of the trust. In all cases, a trustee is required to guard the life interest. The trustee is responsible for making sure that the assets in the trust are handled with care and according to the instructions of the settlor, and that the capital beneficiary actually has something to possess when all is said and done. A trustworthy friend or family member, or an institution such as a bank may act as the trustee.
When should you use it?
A life interest can hold many types of assets.
Say, for example, you have entered into a second marriage and want your spouse to be able to live in the house for the rest of her or his life, but also want the children of your first marriage to eventually inherit the house.
Presto! A trust with a life interest would be an ideal solution!
You could name your spouse as the income beneficiary and your children as the capital beneficiaries.
Of course, it would be critical to consider upkeep costs. Somewhat simpler if the house happens to be a duplex, since one unit can be rented out to help absorb the costs of ownership. Also not an onerous issue if there are funds in the estate for the upkeep of the house.
Otherwise, a good approach would be to have the income beneficiary take care of those costs while benefiting from the use of the house - so, expenses such as a mortgage, utilities, taxes, maintenance, and repair.
It should be noted that, legally, the trustee is responsible for the property. However, it would not be ideal to have the trustee be out of pocket for costs like lawn care and roof shingle replacements. So, the “hook” is in making the income beneficiary’s benefit contingent on upkeep and care for the property, and having the income beneficiary sign a contract to that effect.
Otherwise, if the capital beneficiaries are faced with a significantly rundown house at the end of the day, a court case might be in the future for the trustee, and for the income beneficiary’s estate. Perhaps more importantly, the carefully laid plans of the settlor would have become a mess.
A life interest is usually stipulated as part of a person’s Will, but it can also be set up separate from a Will - it all depends on the settlor’s individual circumstance.
Live in Toronto, Ottawa, or elsewhere in Ontario, and think you might need some estate planning assistance that would see the use of a life interest plugged into your overall estate strategy in a smart and efficient way? Get started here, at afolabi.law