Life tenancy: What are the pitfalls of having such a clause in a will?

Individuals drafting their will need to be aware of the possible negative consequences that can arise from well-meaning intentions, according to South Australian insolvency experts, SimsPartners South Australia.

Mr Alan Scott, a Partner with SimsPartners, said a recent personal bankruptcy for which he had been Trustee was an example of what could happen. He said a homeowner had willed his house to his son and daughter and provided his wife with life tenancy to ensure she always had somewhere to live.

However, the son had gone bankrupt, with his half share in the house being held by the Trustee. “Unfortunately the elderly widow who was still living in the house required nursing home care, but she was unable to move without the sale of the family property to help fund it,” Mr Scott said.

“Because of the son's bankruptcy and the life tenancy arrangement, the family was unable to fund the move.

“As a result, the widow was forced to stay in the family house when she would have been far better off moving to a nursing home.”

Mr Scott said the woman had eventually died at home and the house had been sold. The sale of the house produced enough funds from the son's half share to pay off all his debts.

“It was an unusual and extremely frustrating set of events for everyone,” Mr Scott said.

“While the life tenancy clause was included with the best of intentions, it is important to consider what impact this may have if the unexpected happens and whether another arrangement may be more suitable to protect your family,” Mr Scott said.

Lester Jarmyn, Manager - Wills at Australian Executor Trustees, said life tenancy arrangements were particularly popular among people entering into a second marriage.

“Often a couple is looking to use a life tenancy arrangement as a way of providing for their partner into the future while protecting a share of assets and wealth for their children from a previous marriage,” Mr Jarmyn said.

“However, before making a decision to put a life tenancy clause in your will you should seek professional advice on its implications.

“When we prepare a will involving a life tenancy, we make sure we build in provisions that provide the trustee of the estate with the ability and flexibility to make decisions in the best interests of the surviving partner and in line with their wishes.

“This may involve selling a house property and using the proceeds to buy another property, relocation to a nursing home or payment of an accommodation bond for other retirement housing options. This flexibility ensures the wishes of the will maker and the interests of the beneficiaries are best served.

“From an overall estate planning perspective, it is also important to consider preparing a will that contains testamentary trust provisions, which not only cater for the flexible accommodation needs of a partner but also provide asset protection for an intended beneficiary so that proceeds from an estate are not automatically paid to the trustee in bankruptcy.”