When Love and Legacy Collide: How a Life Interest Can Protect the Family Home

When David lost his wife of forty years, the family home — a graceful Federation house in Mosman — became both a comfort and a burden. Two years later, he met Anne, a retired teacher with warmth and humour that rekindled his joy. They married quietly, and life settled again.

But as David turned seventy, a question began to trouble him:“If I die first, how can I make sure Anne has a home for the rest of her life — yet my children still inherit what their mother and I built together?”

This question, common among blended families, sits at the heart of one of estate planning’s most practical and compassionate tools: the Life Interest.

What Is a Life Interest?

A Life Interest (or Life Estate) is a legal arrangement that allows one person — known as the life tenant — to live in or use a property for their lifetime, without owning it outright. After their death, the property automatically passes to the remainder beneficiaries (often the children).

It’s typically created in a will or trust and gives the surviving spouse peace of mind and stability without transferring full ownership. For example:

“I give my wife, Anne, the right to live in my home for the rest of her life. Upon her death, the property passes to my children, Emma and Tom.”

In this arrangement, Anne can live in the home for life and is responsible for expenses such as rates and insurance. However, she cannot sell or gift the property unless the will specifically allows it. When Anne dies, ownership transfers to the children automatically.

Why Use a Life Interest?

For many families, especially those formed later in life, a Life Interest balances compassion and control. It protects the surviving spouse by ensuring they always have a home, while preserving the children’s inheritance for the future.

It also helps prevent the family home from being redirected to another family line if the surviving spouse later remarries or changes their will. When drafted carefully, it brings both clarity and fairness, reducing the potential for future disputes.

Getting the Structure Right

For a Life Interest to be effective, clarity is everything.

The will should set out who pays for rates, insurance, and maintenance; whether the property can be sold and replaced; and what happens if the life tenant moves into aged care.

Ownership structure is equally important. If the property is held as joint tenants, it automatically passes to the surviving spouse and never enters the estate — defeating the purpose. It should instead be held as tenants in common, allowing it to be distributed according to the will.

Flexibility is also key. Allowing the surviving spouse to downsize or buy another property can prevent hardship and reduce the risk of challenges under family provision laws.

And because these decisions affect both legal outcomes and tax treatment, professional advice should be sought from both an estate lawyer and a tax adviser working together.

Tax Consequences to Consider

Under the Income Tax Assessment Act 1997, when a person dies, any capital gain or loss that would normally arise is disregarded (section 128-10). No Capital Gains Tax (CGT) is triggered at the time of death, and beneficiaries inherit the property at its existing cost base.

A Life Interest and the corresponding Remainder Interest are treated as separate CGT assets (Taxation Ruling TR 2006/14). While no CGT usually arises when the Life Interest is created, there may be implications later when these interests end or are sold.

If the home was the deceased’s main residence, the main residence exemption under Subdivision 118-B typically continues for as long as the life tenant occupies the property. When the children eventually sell it, the CGT cost base is the property’s market value at the date of death — often resulting in minimal or no taxable gain.

In essence, a properly drafted Life Interest can preserve the CGT-free status of the family home for many years.

Avoiding Common Pitfalls

Most problems occur when wills are vague. Disputes often arise over who pays maintenance, what happens if the life tenant moves, or how proceeds are handled if the property is sold.Tension can also grow when children wait decades for their inheritance, or when the surviving spouse feels financially restricted.

These risks are best managed through precise drafting and open communication within the family — ideally guided by professional advice before the will is finalised.

Final Thoughts

A Life Interest is more than a legal mechanism — it’s an expression of care and balance. It allows one generation to protect another, while preserving the integrity of the family legacy.

Handled thoughtfully, it gives everyone what they need: stability for the surviving spouse, clarity for the children, and peace of mind for the person making the will.

“Estate planning is not just about distributing assets. It’s about protecting people — and ensuring fairness continues long after we’re gone.”