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Life interest trusts provide modern solution

Advisers preferred to use life interest trusts over traditional life estate structures as they were free of several complexities.

“Modern equitable life interest trusts can overcome the disadvantages of a legal life estate,” Townsend Business and Corporate Lawyers estate planning and superannuation special counsel Brian Hor told attendees at the latest Bacon, Super and Eggs seminar.

“A separate trustee can hold the legal title to the assets, so it’s harder for the life tenant and remainder person to avoid.

“The trustee is obliged to uphold the terms of the arrangement, such as to repair and maintain, insure, et cetera, and a separate fund can be provided for this purpose, especially via will.”

Hor said modern equitable life interest trusts could also be flexible, for example, tenancy could end on other trigger events such as remarriage of the surviving spouse or failure to comply with a specified condition, and could impose more tailored obligations on the trustee.

Also, variation of the trustee was less likely to cause capital gains tax (CGT) issues.

There were several disadvantages to using a legal life estate, Hor warned.

“It can be defeated if the life tenant and the remainder person agree to sell the asset,” he said.

“The life tenant may have difficulty leasing the asset or securing a loan against the asset unless the remainder person agrees.

“And it can cause conflict between the life tenant and remainder person since the life tenant has no motive to repair or improve the asset.”

He added that if provided to a surviving spouse, a legal life estate might not by itself provide adequately for their proper maintenance and support, so they could contest it by using a family provision claim.

Furthermore, obligations on the life tenant may be hard to enforce and the structure was proven inflexible where changes may have adverse CGT consequences.

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