Life Estate & the Doctrine of Acceleration

A beneficiary of a life interest created by a Will can surrender that interest at any time. Often occurring where a Will creates a number of successive interests and the life tenant motivated by the desire to allow the beneficiaries next in line to enjoy the income or capital of the estate, decides to disclaim or surrender their own interest under the Will. This is known as the doctrine of acceleration as the life interest that fails or ends earlier accelerating the interests of the remainder beneficiaries who then take their interest at that earlier time rather than on the death of the tenant for life.

However, where there is a contrary intention in the wording of the Will or a contingent interest acceleration will not occur.

Masha Lester died leaving a Will dated 21 November 1996 (“the Will”) appointing six separate executors and trustees; probate was granted to just three of these individuals: Masha’s son David, and David’s Sons Damien and Richard, who was later dismissed as an executor following legal action following which a settlement deed was executed in March 1999 (‘Settlement Deed’).

The Will

In the Will Masha:

(a) Appointed David, Damian, Richard, [Beneficiary A], [Beneficiary B] and [Beneficiary C] as Executors and Trustees (Clause 1).

(b) Bequeathed her one half right title and interest to the freehold property known as [the Toorak property] to David for life and after his death to form part of the residuary estate (Clause 4).

(c) Bequeathed the rest of the residue of the real and personal estate upon trust to sell and convert upon the following trusts (Clause 17):

(i) to pay debts, funeral and testamentary expenses (Clause 17.1);

(ii) as to all the rest to the residue (‘the residuary estate’) to pay the net annual income arising from the residuary estate:

  1. As to 50% to David for life.
  2. As to 10% to Damian for life.
  3. As to 10% to Richard for life.
  4. As to 10% to [Beneficiary A] for life.
  5. As to 10% to [Beneficiary B] for life.
  6. As to 10% to [Beneficiary C] for life. (Clause 17.2.1).

(iii) From the date of death of David, Damian, Richard, [Beneficiary A], [Beneficiary B] and [Beneficiary C] (‘the income beneficiaries’) to hold such part for the children of Damian being:

  1. [Alexander]
  2. [Hamish] (‘the children of Damian’)

until they attain 25 years and after they attain 25 years to pay such part of the net annual income as tenants in common in equal shares (Clause 17.2.2).

(iv) On the date of death of all the income beneficiaries to pay both capital of income to the children of Damian when they obtain 25 years as tenants in common in equal shares absolutely (Clause 17.2.3).

(v)In the event that the children of Damien predecease Masha, or die before attaining a vested interest in the deceased’s estate. Damian and Richard would then take the capital and income equally between them (Clause 18).

The Settlement Deed

Clause 4 of the Settlement Deed states:

4.(a) David, Damian and Richard in their capacity as Executors and Trustees jointly and severally covenant and agree to pay from the deceased estate the following amounts to:

(i) [Beneficiary A] the sum of [amount]

(ii) [Beneficiary B] the sum of [amount]

(iii) [Beneficiary C] the sum of [amount] (‘the sums’)

in full and final discharge of all their or either of their rights and entitlements pursuant to the Will within 3 months from these Terms of Settlement being approved by this Court.

(b) [Beneficiaries A, B, and C] covenant and agree that they assign and relinquish their rights to receive income pursuant to the Will, subject to the payment to them of the sums.

(c) David, Damian and Richard in their capacity as Executors and Trustees jointly and severally covenant and agree to pay [Beneficiaries A, B, and Cs’] solicitor/client costs incurred to this day including their costs of the mediation conducted on [date] 1999 and their costs in the implementation of these Terms.

Lester v Lester

Masha owned half the family home in Toorak (“the Toorak property”) with David owning the other half as tenants in common. At the time of Masha’s death, David and his wife were living in the Toorak Property.

David submitted that he was a life tenant with respect to the half share in the Toorak Property owned by the estate. David explained that the right to use the property extends for the duration of his life and does not terminate for instance if he ceased to live in the property.

Alternatively, even if the Court ruled that David didn’t have a complete life tenancy, he would still be a person having the powers of a tenant for life under the Settled Land Act 1958(Vic) (‘SLA’). The SLA provides that the right of a tenant for life in settled land must be something more than a personal right and amount to a legal, or equitable right to possession of the settled land.

Damian submitted that the Will needs to be interpreted independently of the SLA; did not confer a life interest in the Toorak Property but merely a personal right of residency to David. However, Damien concedes that David’s interest was sufficient to meet the requirements as a tenant for life pursuant to the SLA.

The Court concluded that the provision contained in the Will considered within the context of the entire Will so as to give effect to Masha’s testamentary intentions, meaning David held a life tenancy in the Toorak Property.

Similarly, the Court held the net sale proceeds of assets forming part of the estate (including any capital profit made on the sale of Masha’s half interest in the Toorak Property) to be enjoyed by those persons entitled to the income of the trust concerned to be considered capital.

Beneficiaries A, B and C have extinguished their entitlements to continuing income payments so their death will not trigger the entitlement of the great-grandsons (Hamish and Alexander) to income. This is because Beneficiaries A, B and C have no entitlement to receive income and so there is nothing upon which clause 17.2.2 can operate by way of gift over. That clause gives to Hamish and Alexander the income that was formerly being paid to one of the income beneficiaries and, since income is now only payable to Lester income beneficiaries, the death of Beneficiaries A, B or C is of no relevance and cannot trigger any gift over. That part of the capital which would have produced the 30 per cent income for Beneficiaries A, B and C has already been distributed hence there is no income to distribute.

 

 

 

 

 

 

 

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