29th June 2022
What is the difference between a life interest entitlement, under a Will, and a right to reside entitlement, under a Will and why does this matter and where may each solution be better than the other?
It has frequently been the case, stretching back to the Victorian era and previously, that an individual looking to make a Will (hereafter called ‘the Testator’) which makes provision for their surviving spouse or a person occupying a similar position on the one hand and others, (who may be younger and children of the Testator and another), is faced with the difficult problem of trying to ensure fairness where the pot of assets may not be large enough to do that immediately and in a segregated fashion.
This is particularly the case where a significant part of the Testator’s wealth lies in the form of a property that perhaps they and their spouse or life partner live in as their one and only home.The spouse or life partner may, or may not, themselves have an equitable ownership interest in the property; but even where they do, there is still the issue of trying to ensure fairness both by them, after the Testator’s death, and by the adult children of the Testator.There is not necessarily the degree of continuing friendship between the surviving spouse/surviving life partner of the Testator, on the one hand, and the adult children of the Testator by another previous marriage or relationship, on the other; frequently the only connection between the parties will be the Testator themselves. On the Testator’s death, however friendly the relationship may have been beforehand, there is a tendency for that friendship in some instances to fail and turn into something else.
Frequently the Testator will be aware of this potential and comes to their Solicitor or Will drafter with the question as to how they can be fair to all parties.The first thing perhaps to look at is whether there are any, or any sufficient other assets with which to leave to the adult children on the Testator’s death and the extent to which that may compensate them for not receiving immediately (or at all) the Testator’s interest in the family home or indeed to all of the family home, if solely owned in equity by the Testator?If there is, whether that be in cash terms or investment terms or, now, potentially in terms of an inheritable pension entitlement, then that may be a suitable solution to look to, but of course it is one that needs to be appropriately drafted for, whether it be in the form of the Will itself to be made or amended to that, or whether that be by way of changes to the pension entitlement on the death of the person who is primarily entitled to their own pension on reaching pensionable age.
Frequently, that will not result in a situation which is objectively viewable as ‘fair’ because values are not broadly equivalent to one another.This is where the Testator’s interest in the family house needs to be considered.A ‘right to reside’ gives the surviving spouse or life partner the ability to continue living in their deceased spouse’s or life partner’s share of the family home without paying any rent. The survivor will, frequently, be required to show that the property is kept insured to its full rebuild value and they may be required to show that they are continuing to pay the utility bills on an annual basis.
Frequently there will be a requirement on them that they keep the property in as good an order as it was at the deceased Testator’s death. In practice this will mean taking steps to ensure that the underlying fabric of the building is maintained and kept in a safe manner. This does not, necessarily, mean that matters such as interior decoration needs to be dealt with as they are not necessarily integral to the continued capital value of the property.
Frequently, but not always, the Testator will want to see drafted in to the ‘right to reside’ clause the ability, on the part of their surviving spouse or life partner, to ask the deceased Testator’s Will trustees to join with them (if they have a beneficial ownership interest themselves in the property) to sell the property and to reinvest some or all of the Will trust’s entitlement to sale proceeds into the purchase of a new property which may be more suitable for the surviving spouse’s/surviving life partner’s needs. To the extent that the Will trust contributes, that interest would be held on a similar ‘right to reside’ basis for the surviving spouse/life partner. Any excess sale proceeds not required for that purchase would pass automatically to the remaindermen, frequently being adult children or some other favoured beneficiary of the Testator who is to receive financial value, ultimately.
Should the surviving spouse/life partner leave the property to go into long-term care, frequently that act will act as a termination point of the ‘right to reside’.The property would then be sold and, to the extent that the Will trust has an equitable interest in those sale proceeds, those sale proceeds will pass automatically to the Testator’s ultimate choice of beneficiary.The Testator’s Will Trust’s share of sale proceeds will not be available to the individual with the ‘right to reside’ entitlement to support them in long-term care when they are self-funding that care. That individual may, of course, have their own share of sale proceeds from their own equitable entitlement in the property but that is the extent to which they can look to financial value out of the sale proceeds being available to them.
This may well be an appropriate solution for many Testators, but not for all of them. Much will depend upon the capital resources that their surviving spouse or surviving life partner has in their own hands already as at the date of drafting of the Testator’s Will. It is frequently the case that such couples may not necessarily appreciate the size of each other’s assets, or that one party does know and the other does not, and it is the case that the Testator needs to consider whether or not they do know what their spouse/partner has, and if their knowledge is less than they deem it should be, then there should be an appropriate exchange of information before the Testator gives instructions for a Will.
A Testator should also consider the likely pension entitlement of their surviving spouse/life partner, whether that is from that individual’s entitlement to state pension, or indeed any other private pension. The Testator should also consider the extent to which any pension entitlement they may have is capable of being directed to their surviving spouse or surviving life partner and steps should be taken to ensure that is indeed a reality and a reality which is rooted in pension documentation which will lead to that reality being achieved on their death.
But some Testators may come to the conclusion that that is not enough for their surviving spouse or surviving life partner. That may be particularly the case if, having balanced the expectations and needs of that said spouse/life partner on the one hand with those of their adult children on the other hand, and taking into account the parties’ respective capital wealth AND capacity to earn income and/or to receive income from investments, the Testator may determine that ‘a right to reside’ interest in the family home is not sufficient for their spouse or life partner.
That may be where a greater and more flexible entitlement may be called for. That is where a ‘life interest’ may come into consideration.With a life interest, in essence, a downsizing or going into long-term care does not necessarily see value accruing to the adult children at that point in time – any spare capital cash would be invested by the Will trustees in a balanced manner so as to provide, on the one hand, as great a level of income for the survivor as possible (to partly finance their own long-term care, for instance), whilst on the other, trying to ensure that the underlying capital value of the Will trust fund is maintained for the long-term benefit of the remaindermen being the Testator’s adult children or other favoured beneficiary.
These two different types of entitlement are fundamentally different from one another although frequently the theoretical distinction between the two of them can become blurred. An example would be a life interest entitlement where there are similar termination points drafted in as one could expect to see in a right to reside interest under Will. That tends to make the two different types of interest almost interchangeable in format from one another.
We’ve already touched upon one termination point being ‘permanent cessation of actual residence’ by the surviving spouse/life partner.Frequently this will be by reason of that individual having to go into long-term care because they can no longer continue living, safely, in their deceased spouse’s/deceased partner’s property.But equally it could be because they’ve moved back to their own property, or had purchased a property out of their own resources. Such a termination point could be drafted either into a ‘right to reside’ interest under a Will or indeed a ‘life interest’ interest under a Will.
Another term potential termination point for the draftsman and the Testator to consider employing is the marriage/remarriage of the surviving widow/widower or life partner (such term as marriage/re-marriage to include entering into a civil partnership or entering into a new civil partnership).
Whilst both marriage and civil partnership under the civil partnership act are clearly both ascertainable and definable concepts in law and in fact, very frequently those engaging in a later life relationship with another may well not choose to marry/remarry or enter into a civil partnership or entry into a new civil partnership. Are there then any drafting techniques that are possible so as to bring the right to reside or indeed the life interest to an end in those circumstances? There are, of course, but it is the writer’s personal view that the adoption of such a drafting device is a bad idea fraught with difficulties and that that should be explained to any Testator wishing to have that in as a termination point within their Will.
The reason why is that it is objectively very difficult to be able to prove to a reasonable degree what is or indeed is not happening with a situation of accommodation sharing.
- Is it to friends who are sharing the costs of accommodation due to a lack of finance/a sharing of responsibilities as they age? or
- is it a relationship in the now increasingly old-fashioned terminology which is “akin to that of husband and wife” (or should we say now ‘akin to spouse and spouse or akin to civil partner and civil partner’?)
To the writer’s mind, this makes everyone into an private investigator as to what is or is not going on without any way of ascertaining the truth, and puts an almost impossible burden upon any professional executor/trustee or whomsoever is trying to act for each of the respective parties.Whilst a life interest entitlement tends to run until a termination point, being either death of the surviving spouse/civil partner, or their cessation of permanent occupation, or entering into a new marriage/civil partnership et cetera, all of these are potential termination points for a right to reside, but there is another potential termination point for a right to reside entitlement and that is a right to reside for a set time period commencing from the date of death of the Testator.This can be helpful if all that is required, by the Testator, is an appropriate timescale for the surviving spouse/surviving civil partnership partner et cetera to grieve, and, thereafter, to make arrangements to buy an alternative property to live in, out of their own resources. For some, this will be appropriate particularly if there is surviving spouse/civil partner who is of an age when they will be working and alternative accommodation would be something they should be able to finance out of a combination of their own savings/investments and their salary.
But the decision as to what is suitable and what is not suitable is clearly driven by both a consideration of the assets that the Testator has, as well as those of all of the other relevant parties discussed above, together with a consideration as to the parties’ respective needs and expectations.For any Testator gets it wrong in their Will, there is always the risk of an Inheritance (Provision for Family and Dependents) Act 1975-type-claim being made against their estate, come from either via the surviving spouse/life partner or by the disappointed children et cetera.
So, there is no one size fits all here and this sort of consideration does make the Will very much ‘bespoke’ to the factors in consideration which will be, to an extent, unique in each and every case.
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