What is a Life Interest?

What is a Life Interest?

A life interest in property, often referred to as a life estate, is a legal arrangement that grants an individual (known as the life tenant) the right to use and benefit from a property during their lifetime. This type of interest is commonly used in estate planning to ensure that a designated person can live in or derive income from a property for the remainder of their life, while the ultimate ownership of the property (referred to as the remainder interest) is passed to another party (known as the remainderman) after the life tenant’s death.

Understanding the intricacies of life interests in property is crucial for anyone involved in estate planning, asset protection inheritance matters, or real estate transactions, as it affects the rights and responsibilities of all parties involved.

Types of Life Interest Trusts

Unregistered. Used when the entity getting the life interest does not want the benefit of a principle place of residence. The Life Interest is unregistered and does not show up on title.

Registered. Used when the entity getting the life interest want the benefit of a principle place of residence. The Life Interest is registered on title.

Stamp Duty. The granting or sale of a life interest does not attract stamp duty in NSW and VIC but stamp duty is payable in Qld and WA (therefore no real benefit in the latter states).

Scenario B: I live in my own home (A) with little debt and now want to move to a new home (B) and keep the original home (A) as an investment property.

• How can I structure the transaction to manage my Estate Planning, create asset protection,?
• How can I minimise stamp duty on the transaction?
• How do I structure my debt?

Solution

Use a Life Interest and a Property Investor Trust (PIT)

Step by Step Process

Step One: Sell the property (A) to a PIT at full market price.

Step Two: Borrow full funds to buy home (A) in the PIT

Step Three: As the seller of home (A) you get the full funds to purchase home (B)

Tax Benefits

• There is no CGT when you sell your PPR
• The land tax is now on home (A)
• Stamp Duty is paid by the Trust on home (A).
• This can be reduce to nil as the Life Interest is purchased by the Trust and NOT the title of the property

Other Considerations

• Interest and other expenses are now tax deductible on home (A)
• A Trustee (company) will be set up for PIT

If the property is to be sold then the following needs to occur:

• The Trust has an enforceable right of occupation (life interest) that first has to be terminated in order to sell the first residence (Home A)
• Before the new owner can gain clear title to the home, the life interest (lease) must be terminated
• The termination of the lease will result in the Trust incurring capital gain equal to the market value of the lease plus its original purchase price plus less what it receives on termination