Life Interest Wills

Life interests can be created in a number of different circumstances. Often a Will is used to create a Testamentary Trust by giving a life interest in an asset to a spouse (the “life tenant”) and the capital residue left over to the children (the “residuary beneficiaries”) once the life tenant dies.

Another example of a life interest is where a Trust in a Will is created for a particular child who may not be able to look after themselves. This is referred to as a Protective Trust for Life with the capital left over upon the death of the child going to certain named residuary beneficiaries.

Examples of assets in which life interests are typically granted are the family home where the life tenant receives the benefit of the use of the home (often with couples the deceased’s half interest in the home), and income from investment assets which were in the sole name of the deceased.

Residential care subsidy

Life interests created through Wills can often be an effective means of enabling the surviving spouse to obtain a residential care subsidy through having only half of what were the joint assets taken into account in the residential care subsidy application.

For example:

1. John and Mary own a house valued at $400,000, have $100,000 in term deposits and a car. They are aged 78 and 75 respectively and receive national superannuation and interest on the terms deposits as there income.
2. They establish life interest Wills and change the ownership of the house into a tenancy in common where each of them has a distinct half share and divide the term deposit equally between them.
3. If John needs residential care and Mary continues to live in the house, the car and the house and up to $115,000 are allowed – John would receive a residential care subsidy. The life interest wills, tenancy in common and split term deposits would not alter this situation.
4. John dies and Mary is left with half of the house in her name, the term deposit in her name and the car. She has a life interest in John’s half of the house and receives the income from John’s term deposit.
5. Mary subsequently needs residential care. The house is sold for $420,000 (net) and Mary gives the car (value $6000) to her granddaughter. Mary has $210,000 in her name from the sale of and $50,000 on term deposit. The current WINZ criteria allow gifts of $6,000 per annum and a total of $210,000 in combined assets. Mary can reduce the cash she has by establishing a funeral trust for up to $10,000 – this is allowed by WINZ. The combined assets amount of $210,000 will increase by $10,000 each July. Mary will not currently be eligible for a care subsidy but will be entitled to one within one or two years with further gifting of $6,000 per annum, the $10,000 increase each year and the use of some of her capital in paying for her care in the meantime.
6. John’s estate will have $260,000 in it from the sale of the house and his term deposit. This sum is not included in the assets declared in Mary’s application for the WINZ subsidy. Depending on the terms of the life interest the income received by John’s estate may not need to be included in Mary’s WINZ application either – and can be accumulated in the estate or paid to the residual beneficiaries in his estate – his and Mary’s children.

Without the life interest Wills and the divided assets survivorship would apply and all of the cash ($500,000) would be in Mary’s name. It would be a long time before she could successfully apply for a WINZ subsidy.

A deed should be completed between the couple creating life interest Wills whereby it is agreed that neither one will alter their Will to remove the life interest without the consent of the other.

Two trustees are required in each Will to ensure that the interest in the estate of the first of the couple to die is kept separate from the survivor’s interest in any jointly held property.

Usually a survivor has reasonably full use of the assets in the deceased spouse/partner’s estate for their lifetime and the income from them.

Trustee’s duty to treat beneficiaries equally

One of a trustee’s key duties is to treat beneficiaries equally and impartially, unless another intention is specifically expressed in the Trust Deed or Will. This may not be easy – a life tenant, or “income beneficiary”, will benefit more from investments which produce a higher income whereas residuary beneficiaries, or “capital beneficiaries”, will benefit more from investments which will increase in capital value.

In Re Mulligan (deceased) [1998] 1 NZLR 481, the High Court found that in order to maintain impartiality between life tenants and residuary beneficiaries, trustees have a duty to diversify the Trust’s investments.

In Mulligan a widow, Mrs M, received a legacy in the Estate of Mr M (Mrs M’s deceased husband) and a life interest in the balance. Mrs M lived for a further 40 years. The trustees sold the main asset of the Estate, a farm, 16 years after Mr M’s death. Subsequently, the trustees invested the estate’s assets in fixed interest securities. This maximized Mrs M’s income but significantly eroded the real value of the capital. The trustees recognised the drastic effect inflation was having on the Estate’s investments yet did not take sufficient steps to address the problem. The trustees were therefore found liable to the residual beneficiaries.

For further information, or to discuss Life Interest Wills please contact Tony Fortune or Katherine McCarthy.