Structuring of Wills can include many forms of trusts, from an optional testamentary trust which provides flexibility as to income and capital for beneficiaries, to restricted trusts which provide a beneficiary with access to income but limited or no access to capital.
What is a life interest?
A life interest (or capital protected trust) is a trust in a Will in which there are restrictions imposed on a particular beneficiary’s access to capital of the trust – typically called “the life tenant”. The beneficiaries entitled to the capital of the trust at the end of the life interest, generally on the death of the life tenant, are called “the remainder beneficiaries”.
Typical scenarios where life interests might be incorporated in a Will include:
- The Willmaker is part of a blended family and wishes to ensure that their second spouse is looked after for their lifetime but that there is certainty that most (if not all) of the capital is preserved for the benefit of their own children; and
- Parents wishing to preserve capital for their grandchildren because they may be concerned about spendthrift children wasting their inheritance.
Assets which form part of the life interest remain as part of the estate of the deceased (and held by the trustees of the life interest – often the executors of the estate). At the end of the life interest, the remaining capital continues to be dealt with as part of the initial Willmaker’s estate for the benefit of the remainder beneficiaries, rather than forming part of the life tenant’s estate.
The inclusion of a life interest or capital protected trust in a Will needs to be carefully considered. Whilst they essentially allow a Willmaker to “rule from the grave”, they can be problematic and complex to administer, and advice should be sought on their use and the drafting of the terms of the trust.
Should I incorporate a life interest in my Will?
Below are some of the advantages and disadvantages of incorporating a life interest in a Will.
| Advantages | Disadvantages |
|---|
| Provides a level of certainty that estate assets will pass for the benefit of the remainder beneficiaries. | The Will is generally more complex than a Will which provides direct gifts to a beneficiary.
A life tenant may seek to challenge the life interest or capital restrictions in favour of a more flexible or outright benefit. |
| The Willmaker can direct specific assets or their entire estate to a life interest trust. | Life interests can only apply to certain types of arrangements. Joint assets intended to form part of the life interest must be changed to tenants in common if a Willmaker intends for their “share” to form part of a life interest.
Superannuation benefits paid into a life interest for a spouse or other tax dependant as the life tenant lose their concessional tax status as the ATO will generally apply the “look through” approach for tax purposes.
Vacant residential land tax (VRLT) is likely to be payable for a holiday home held in a life interest trust, even though it may be used and occupied by the life tenant as their holiday home (under current law).
Consideration should be given as to how costs associated with the assets of the life interest are to be funded. Is the estate or the life tenant to be responsible for expenses such as rates, land tax (including VRLT under the current law) and insurance premiums on property, and/or costs of repair and improvements to trust assets? |
| The life tenant has access to income generated by the assets of the life interest. | The assets of the life interest may not necessarily be income producing assets, eg, the life interest comprises solely of a property in which the life tenant is living in as their principal place of residence. |
| A life interest can provide tax effective income splitting opportunities if the terms of the trust permit income to be distributed to a broader class of beneficiaries, eg, with the consent of the life tenant. | If the life interest holds shares, it is likely to be necessary to make a family trust election in order to claim franking credits. In a second relationship, where there are no mutual children, it may not be possible to choose a test individual which includes the second spouse and the children of the deceased person. |
| The Willmaker can direct to what extent, if any, capital can be accessed for the life tenant. | Capital restrictions leave the life tenant vulnerable if unexpected or unforeseen costs arise during their lifetime, with little or no other resources of their own to meet those costs. |
| The trustee can have broad powers of investment over assets forming part of the life interest. | Property held or acquired in a life interest attracts a surcharge rate of stamp duty and land tax if the beneficiaries of the trust include foreign beneficiaries (unless an exemption applies). In Victoria, provided the terms of the life interest include an amendment power, the terms can be amended to exclude foreign beneficiaries. This is not the case in NSW. |
| The life tenant has the use of the assets for their lifetime | If the life tenant has to move into aged care, this is unlikely to be able to be held via a life interest and it may be necessary to loan funds to the life tenant to allow them to acquire their aged care placement. |
How we can help
Life interests or capital protected trusts are effective structures for preserving wealth for future generations. They can, however, be complex and costly to administer and require careful consideration of the terms and the assets intended to form part of the trust. To learn more about how Moores can help you decide if a life interest or capital protected trust is right for you, get in touch with our Wills, Estate Planning and Structuring team.
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Disclaimer: This article provides general information only and is not intended to constitute legal advice. You should seek legal advice regarding the application of the law to you or your organisation.