Life Estates

Life estates, also known as life interests, are a well-established part of estate planning. The owner of a life estate (“the life tenant”) has the right to occupy, use and deal with real and/or personal property for his or her lifetime. When the life tenant dies, the remaining interest in the property then passes to the next person entitled, historically named the “remainderman”. The interest remaining after the death of the life tenant is called the “remainder interest”. After the death of the life tenant, the remainderman enjoys full ownership of the property.

Historically men of means, by their wills, left their wives life estates in their property. The widow could use the matrimonial home and investments for her life. When she died, these assets would then typically pass to their children.

In modern times, life estates are often used by testators in second marriages. They are used to provide security both to the second husband or wife and to ensure the ultimate inheritance of the property by the testator’s own children. A life interest is provided to the second spouse with the remainder interest in the property passing to children, after that spouse’s death.

Life estates, such as a discretionary trust for life, may also be used to provide financial security for disabled children, spendthrift children or drug and/or alcohol addicted children. Because the child never has complete control of the principal, he or she cannot dissipate the assets.

During his or her lifetime, a life tenant enjoys the right to possession and management of the property. This includes the right to earn rent from the property.

The various obligations of the owners are apportioned between the life tenant and the ultimate owner, the remainderman. For example, the life tenant will be responsible for paying the property taxes and the interest on any mortgage. The remainderman will be responsible for insuring the property and repaying the mortgage principal.

In general terms, a life tenant is entitled to use the property during his or her lifetime, but must treat the property in such a manner that it is not damaged and does not deteriorate, beyond reasonable wear and tear.

Life estates may be created:
• by will;
• by a trust indenture;
• by land transfer
• by court order;
• pursuant to s. 96 of the Estate Administration Act, RSBC, which covers succession on intestacies. It gives the surviving spouse the right to use the matrimonial home as a residence for life.

Caselaw Dealing with Life Interests Created by Will

1. Wilson v Wilson (1944) 1 W.W.R. 223

In this case the will provided the wife should receive all of the deceased’s property“for her sole use and benefit forever”. This was immediately followed by a direction that, upon her death, the residue be equally divided between their children.

The court held that the wife took only a life interest and the remainder went to the children. They found that the use of the word “forever” only emphasized that during the wife's life, she should have the sole use and benefit of the property.

2. Pellan Estate v Pellan 1954 CarswellBC 92

The deceased left a homemade will that included the following clause” I give, devise and bequeath unto my husband the house at 1115 Princess to enjoy as long as he is able and then sold or given to the old ladies home”.

The court ruled that “to enjoy as long as he is able” can mean, at most, as long as he shall live. Therefore the husband received only a mere life interest.


3. Re Mulhall Estate (1975) W.W.D.120

The deceased’s will gave the whole of his estate to his wife so long as she remained his widow and in the event of her remarriage, the estate was to be wound up and divided in a specified manner.

The court held that it was clear that the stated intention of the testator was for the widow to hold the whole of his estate so long as she remained a widow, and went on to provide specific directions as to the vesting of his estate in the event of her remarriage. The widow therefore only received a life interest.

4. Cielien v. Tresidder 1987 Carswell BC 159 BCCA

The testator died after living with his common law wife and her son for 12 years. He left a stationary form will that provided that his common-law wife was to have the testator's real property and all his other assets. It continued “however, upon the sale or disposal of the real estate as described above, the proceeds shall be equally divided between her son and my children.”

The trial judge held that the meaning of the will was to only give her a life interest in property. On appeal the court held that there were no words in the will to support an intention on the part of the testator to confer on his wife only a life interest in the property. On the contrary, he had intended her to have an absolute interest in it.

Caselaw Dealing with Power of Encroachment

1. Re Tomashewsky Estate (1923) 1 D.L.R. 1143

A testator gave all his real and personal estate “unto my wife, to use it all during her life, and after her death to pass among our children as she may think proper to divide and direct”.

On an application to interpret the will, the court held that the widow took only a life interest in the property with no power to encroach upon the capital of the estate. Upon her death she could give the remaining personal and real property to such of the children as she might select.


2. B.C. Minister of Finance v. Fraser (1974) 6 W.W.R. 560

By will a testator left his wife “a life interest in my estate and property”. The will provided that the remainder was to pass to a charitable society.

The estate consisted of both real property and cash. The issue was whether the spouse was entitled to encroach upon the cash during her life.

Since there was no clause in the will showing that the testator intended his widow to have a power of encroachment on the estate capital, the court ruled she was not allowed to do so.

The court held that it was well settled law that when the words “life interest” are used in the will in relation to personal property, then the life tenant may enjoy the income and nothing more. A testator must expressly or impliedly indicate an intention to give the life tenant a power of encroachment.

3. Pask v Tyler 1977 Carswell BC 293

Here the court was asked to determine whether the words “during her lifetime” created an absolute interest, a life interest, or a life estate with a power of encroachment.

There was no specific clause in the will allowing the wife to encroach on capital. Nevertheless, the testator did empower his trustee to convert his assets into cash and credit and to invest in any investment which she in her uncontrolled discretion considered advisable.

The court held that the power to convert and invest, read together with the other clauses in the will, established that the testator's true intent was to bequeath a life estate to his wife with power to encroach upon the interests of the remainder. The court reasoned that since the estate was not large, if the testator had intended that his wife should only have the income from the estate, then he could have easily expressed that intention.

Disputes Over Repairs to the Property

Leaky condominiums have squarely raised the question of financial responsibility for costly repairs.

According to Water’s Law of Trusts in Canada, third edition, at page 1050 -51:

“ … the generally followed rule is that the tenant must meet ordinary or day-to-day repairs out of income, while repairs to the structure are the responsibility of the capital. This makes perfectly good sense, given the nature of each successive beneficiaries interest. Unfortunately, the authorities are by no means clear…..”

The Estate of Lynn Louise Hawkins, Deceased 2006 BCSC 1374 involved litigation concerning a leaky condo and the question of whether a life tenant should bear the expense of the significant repairs. In this case, the repairs amounted to over $71,000.

In this case the strata corporation had made the repair and then passed the cost along, as a special levy, to the individual unit owners. Under protest, the life tenant who had inherited under an estate, paid this strata council assessment. She then sought reimbursement from the estate, arguing that the special levy was not truly her responsibility as it did not represent “maintenance costs and repairs” as stipulated under the will.

The court held that the language of the repair clause under the will did not make the special levy a repair obligation of the life tenant. Instead, the court found that the levy represented an expense of a capital nature and was thus an obligation of the estate.

The court referred to a number of decisions differentiating between recurring, periodic repairs and those repairs necessary for the proper preservation of the building. The cases held that restoration repairs should be paid out of capital and whereas recurring repairs should be paid out of income. The court recognized that these general principles are often difficult to apply, particular for the trustee who has a duty to act impartially between the beneficiaries.

Determining the Value of a Life Estate

There is clearly a significant value to a virtually mortgage free home for life, which is often what a life estate entails. But what if one wants to move? Assessing the value of the life estate appears relatively simple in cases where the life tenant continues to live in the home or collects rents. Presumably the value can be calculated using the monthly rentals and the life expectancy of the life tenant and capitalizing the result.

It becomes more complicated, however, where a life tenant must sell the property thus ending the life estate. Such a situation may arise where there are insufficient estate assets to pay the estate debts and expenses requiring the property to be sold. Another example may involve joint ownership where the life tenant only owns a one half interest in the property and the one owner wishes to force a sale of the property under the Partition of Property Act.

The case law is not entirely clear as to whether, in such circumstances, the life tenant has a measurable value, capable of capitalization, and payable to the life tenant upon the termination of a life estate. It may depend on whether one is dealing with historic common law rights or statutory rights on intestacy accorded by the Estate Administration Act.

In Aho v Kelly 57 BCLR (3d) 369, the court dealt with the situation involving the settlement of previous estate proceedings between a stepmother and two stepchildren. The settlement involved registering the title to the matrimonial home in all three names as equal tenants in common. It also included, however, the formal registration on title of a life estate in the stepmother's name.

The stepmother maintained that she enjoyed a common law life estate in the lands and that her interest had a value capable of capitalization. She argued that value of her interest was significantly higher than a one third interest in the proceeds of sale.

The court noted that it should be extremely cautious in ordering the sale of lands subject to a life estate without the consent of the life tenant. In this case, the court found that it had jurisdiction to order a sale because the stepmother did in fact consent.

The court found that the widow’s life interest did have a value capable of capitalization. It further found that, upon partition and sale this value should be paid from the sale proceeds, to the widow in priority to the remaindermen step children.

The court determined the value of the life estate based on the widow having a life expectancy of a further 18.7 years. This yielded a value entitling her to receive 76% of the sale proceeds upon sale, in priority to the two stepchildren who shared the balance.

A very different conclusion was reached in Khan v Khan 2004 BCSC 186. This case also dealt with the issue of the capitalized value of a life estate given upon intestacy, however in this case it was dealing with a life interest given under the terms of the Estate Administration Act. This case reached a very different conclusion.

In Khan the deceased husband had owned 50% of the house as a tenant in common with his mother. The house consisted of two self-contained units with related families living in either unit.

The husband had died intestate thus his widow inherited a life estate under the provisions of the Estate Administration Act. The widow sought a court order for partition and sale of the house and a direction that she was entitled to the balance of the sale proceeds after the mortgage was discharged (she was only 38 years old, thus the actuarial value of her life interest was calculated to be worth 96% of the value of the entire home.)

The court held that the wife was entitled to only a life estate in the one half of the property owned by her husband and that this interest would end if she chose to sell. The court relied, in particular, on the wording of Estate Administration Act, s. 96 which provides that the life estate shall exist for “so long as the surviving spouse wishes to retain the estate for life.” At para [17] Groberman, J found “ This language is inconsistent with the idea that the beneficiary of the life estate may choose to sell it.”

The court held that the wife's application for partition and sale was inconsistent with any wish to retain the estate for life. Accordingly the wife's life estate would be extinguished upon sale and thus had no value.

Conclusion

Life interests have long been important estate planning tools and it is expected that their use will continue as such. We can anticipate more litigation involving these estates as our society become more complex and life expectancies increase.