Property rights in Australia can be a difficult landscape to navigate and when it comes to estate planning, the terms “life interest” and “right of residency” often surface.
While these terms might sound similar concepts, they actually represent different legal concepts with different implications for property owners and beneficiaries.
When you own a property in your own name, you Will controls how that property is to be dealt with after your death. What if you wish to have someone live in the property but ensure that the property ultimately ends up with another person? An example may be:
Harry and his second wife Beth live in their home in Geelong. Harry owns the home in his name and after his death he wants Beth to be able to live in the home for as long as she like however, once she leaves the property, it is to be transferred to his children.
In this article, we discuss how this could be achieved through either a life interest or a right of residence.
Life Interest
Using the above example, a life interest, also known as a life estate, grants Beth (the life tenant) the right to use and benefit from the property for the duration of her life.
Here are the key aspects of a life interest:
Duration – a life interest will last for the lifetime of Beth (as the life tenant) and upon her death the property will be transferred to Harry’s children (as the remaindermen).
Rights – Beth has the right to live in the property, receive rental income, and use the property as she sees fit, as long as she does not adversely impact the value of the property. It is important to note that Beth may have the right to sell the property and use the proceeds to purchase a new home or to live off the income from the sale.
Responsibilities – Beth would normally be responsible for maintaining the property, paying property rates and taxes, and covering insurance costs. However, any major structural repairs, might be the responsibility of Harry’s children or the deceased estate, depending on the terms of the Will.
Life interests are most commonly used in estate planning to ensure that a surviving spouse can continue to live in the family home while preserving the property for future generations.
A life interest can provide security for the life tenant while ensuring the property eventually is transferred to the intended beneficiaries.
Right of Residency
Using Harry & Beth as an example, a right of residency would be more of a restricted form of property interest compared to a life interest for Beth. A right of residency would grant Beth the right to live in the property but with certain restrictions.
Here are the key aspects of a right of residency:
Duration – the right of residency can be for a specified period or for Beth’s lifetime depending on the terms set out in Will. It may be that the right of residency ends when Beth wishes to leave the property, her death or if she does not keep the property neat and tidy.
Rights – Beth can live in the property but typically she will not have the right to lease it out or receive rental income. She would likely be restricted from making significant changes to the property without the consent of Harry’s children or the executor of Harry’s estate.
Responsibilities – Beth may be responsible for routine maintenance and utilities, but usually major expenses, property rates and taxes would usually be the responsibility of Harry’s estate or his children.
Unlike a life interest, a right of residency does not usually transfer any ownership rights and the property will remain in the name of the executor of the deceased estate until the residence is terminated.
Key Differences
While both a life interest and a right of residency allow a person to live in a property, the key differences are held in the scope of rights and responsibilities:
Ownership:
- A life interest provides a broader scope of rights, including the potential for income to be made from the property and greater autonomy over the property; and
- A right of residency is more restrictive, focusing only on the right to live in the property.
Duration and Transferability:
- A life interests will last for the lifetime of the life tenant and is not easily revocable; however
- A right of residency can be for a set period or for life and do offer some flexibility for conditions to be imposed.
Maintenance and Costs:
- A life tenant is generally responsible for more costs relating to the property; whereas
- A resident with a right of residency may only cover basic maintenance and utilities.
What to consider
If you are looking to provide someone with the opportunity to live in your home after your death, you should consider the following:
- Future Control: How much control do you want to retain over the property?
- Beneficiary Needs: What are the needs of the person who will live in the property?
- Estate Planning Goals: What are your long-term estate planning objectives and how would this impact your beneficiaries and the distribution of your estate?
How we can help?
Understanding the nuances between a life interest and a right of residency is crucial for effective estate planning. Both options have their advantages and limitations and we work with our clients to learn their individual circumstances and goals as this will ensure that your property and estate plans align with your wishes and provide peace of mind for the future.
For more information, please contact our Wills and Estates Team on +613 9614 7111 or by email to melbourne@nevettford.com.au.