Life Interest Valuations

A life interest is an entitlement of a person to own or benefit from an asset, usually for the term of their life. This individual is known as the life tenant, who must maintain the asset. The most common asset is a residential property.

There are many reasons to value a life interest, such as: sale of life interest, a divorce, income tax calculation, stamp duty calculation or as requested by Services Australia. The life interest valuation provided by Actuarial Support is suitable for all these purposes.

Request a Life Interest Valuation

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Additional Information Required:

  1. Copy of the document creating the life interest.
  2. In the case of life interest in a property, a real estate valuer’s opinion of the value of the property and the likely net rental it would earn.
  3. Where the life tenant is responsible for the payment of any of the following, a copy of the latest invoice: council rates, water charges, land tax, property insurance, body corporate fees, pest control

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Knowledge and Guidance Around Life Interests

A life interest is an entitlement of a person to own or benefit from an asset, usually for the term of their life. This individual is known as the life tenant, who must maintain the asset. The most common asset is a residential property, but the life interest can be in other assets such as share portfolios. The asset is held in trust until the life interest expires. At this point the asset is transferred to the remainder beneficiaries who may sell the asset and profit from the proceeds. Thus the remainder beneficiaries have a future interest to possess the asset.

Life Interests are often used to provide financial support to someone during his or her lifetime, but control who finally gets the assets. For example, supporting a current spouse for their lifetime, but preserving capital for one’s own children.

Some people grant a life interest during their own life, but it is most common to do so via a will.

The document that creates the life interest (eg will), will name the life tenant and remainder beneficiaries. It will describe the other terms of the life interest such as:

  • Term of the life interest. Common examples of when the life interest might expire are: death of the life tenant, specified time, if the life tenant remarries, if the life tenant moves out, failure of the life tenant to maintain the property.
  • Whether the life tenant can rent the property.
  • Whether the life tenant can live at the property.
  • Whether the life interest can sell the property and buy another.
  • Who is responsible for the payment of maintenance expenses.

There are many reasons to value a life or remainder interest in an asset.

  • Sale of life interest: Rather than receive their entitlements as a life tenant, the life tenant may wish to forego their life interest for a sum. This will allow the remainder beneficiaries access to sell the underlying property earlier.
  • Divorces: In a divorce proceeding, a life interest or remainder interest may be deemed to be property to be distributed under Family Law Act 1975 s79, or a resource relevant to the distribution of property under Family Law Act 1975 s79(5).
  • Financial Accounts. Financial accounts may require the market value of a life or remainder interest prepared under accounting standard AASB 13 Fair Value Measurement
  • Income Tax. Where a CGT event has been triggered, the value of the life interest is used in the CGT calculation.
  • Stamp duty. Where a stamp duty conveyance has been triggered, the value of the life interest is used in the stamp duty calculation.
  • Services Australia. Can require a valuation of a life or remainder interest, in particular when a life interest is surrendered, created or sold.

Actuarial Support will provide a Valuation and Report suitable for all the above purposes.

  • The valuation will include documented compliance with the principles of the International Valuation Standards Council, ATO guidance on market valuations, Family Law practices on fair market rules for asset valuations and Australian Accounting Standard AASB 13 Fair Value Measurement.
  • The Report is consistent with the requirements in Chapter 7 – Experts and Assessors of the Federal Circuit and Family Court of Australia (Family Law) Rules 2021.
  • This Report is consistent with the requirements of the Expert Evidence Practice Note (GPN-EXPT) issued by the Federal Court of Australia. The Report author will acknowledge that he has read this code and agrees to be bound by it.
  • The valuation and report will be prepared under the professional standards of the Actuaries Institute (of Australia), in particular Practice Guideline: 199.03 Economic Valuations and Practice Guideline 1: General Actuarial Practice.

The Australian Government Actuary (AGA) has produced a simplified valuation basis for life interests.

In calculating stamp duty, some states allow or promote the use of the AGA basis for the apportionment of the value of an asset between the life interest and remainder beneficiaries. Services Australia can source an AGA valuation also.

The valuation provided by Actuarial Support can be used to challenge the AGA valuation and assumptions. The AGA valuation will generally over-value the Life Interest relative to a more precise calculation.

Also, the AGA basis assumes average health of the life tenant for their age. Actuarial Support can produce a life interest valuation reflecting the actual health of the life tenant. This will require support from a medical expert.

The valuation consists of the discounted value of the future probability weighted cashflows that represent a benefit to the life tenant. For a life interest in a property, the cashflows are the cost of renting a similar property for the period of the life tenants’ rights. The rental cashflows are offset by the expenses incurred by the life tenant in maintaining the property where these expenses would be incurred by a landlord if the property were rented.

Assumptions for the valuation of the life interest in a residential property are:
• Market value of property.
• Rental income of property.
• Maintenance expenses of property
• Inflation
• Mortality rates of life tenant
• Surrender rates of life tenant.
• Discount rate of net cashflows.