Life Interest Valuations: What you need to know

With an increasing number of blended families, the issue of property ownership can become complicated.  McLennan Steege Smith and Associates is often called on to do what is known as ‘Life Interest Valuations’.

A life interest relates to a situation where one party is granted the right to live in/on a property until the death of the life tenant and it is then passed to a third party.  Those who receive the property at the death of the life tenant are called ‘remainderman/men’.

Both the life tenant and the remainderman have real interests in the property but they do not hold ownership at the same time.  The remainderman’s interest does not become activated until the death of the life tenant.

Life interests are often created taking into consideration a spouse of a second marriage, naming the children of the first marriage as remaindermen.  That usually means the second spouse has the right to utilise and occupy the property until their death, but once their death occurs ownership of the property is then passed to the children of the first marriage, rather than relatives of the second spouse.

Life estates are generally terminated when the life tenant dies. However, some life estates specify one or more other conditions that can trigger termination:

  • In the case of divorce (where one or both spouses have life interest) or the tenant needs to ‘sell’ for health or other reasons.
  • One of the beneficiaries may like to apportion the current value of the life interest immediately.

A market value of a life interest can also be required for financial accounts or to calculate relevant stamp duty.

Here’s an example of a life interest scenario:

Ann remarried in her 70s after the death of her husband several years earlier.  Ann and new husband, Ted lived in the house where she and her previous husband had raised their family.  When she passed away, she gave her second husband a ‘life estate’. This allows Ted to live on the property until his death at which time the house’s ownership would pass to Ann’s two daughters.

However, due to ill health, Ted needs to move into a nursing home.  To do so he needs to use his share of the property to help fund the nursing home.

If the daughters decide to sell, then Ted would receive a portion as the life tenant and this portion needs to be calculated based on a number of different factors.

How is a life interest valuation calculated?

A life interest valuation is intended to be fair to all parties and is calculated based on a model that takes into account the following:

  • the ‘asset’s’ yield (net of costs incurred in maintaining or managing the asset)
  • the expected number of years, on average, a life tenant with indifferent health (i.e. typical health for a person of that age group) is expected to live

We work with a number of legal firms to provide life interest valuations for a variety of reasons.

If you would like to know more about life interest valuations, contact McLennan Steege Smith & Associates on (02) 9525 7378.