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Life estate, Relationship Property

Life interest not protected by a trust

A recent relationship property case highlight the often overlooked need to appreciate what is, and what is not, protected by a trust. 

The facts are as follows:

  • marriage breaks up
  • husband’s assets, which were owned since before the marriage, were retained by him pursuant to a relationship property agreement
  • some years after the marriage ended the huband settled a trust
  • the following year a home he owned was sold to the trustees subject to a life interest that he reserved for himself
  • a few years pass and he reconciles with and re-marries his former wife

Sadly the second marriage was ultimately as ill-fated as the first.  However, second time around his wife fared a little better when it came to divying up the property.  Although assets that would otherwise be available for division were protected by the trust, the life interest, which was potentially more valuable than the legal ownership of the house, was not owned by the trust, having been retained by the husband.  Second time around there was no relationship property agreement.

Consequently the value of the life interest was  available for division between husband and wife.

This case, and cases like it involving trusts, highlight the fact that while trusts can protect assets from relationship failures; by themselves trusts can often provide, at best, partial protection. 

By contrast a well thought out relationship proprty agreement, in combination with a well-managed trust, settled on appropriate terms; can prove the difference between [to paraphrase a very old insurance ad] a pyramid, and half a pyramid.

From a professional perspective, any adviser who acts on the sale of property where a life interest is retained also needs to ensure that the client appreciates that the protection provided by the trust will not extend to the life interest.

Note:  On 3 September the High Court has refused leave to appeal this decision.  This further decision of the High Court also includes further useful consideration of how life interests should be valued where reference to the actuarial tables in the Estate and Gift Duties Act  is not appropriate.

References:

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