It is not unusual to see estate plans that leave an interest in real property or other assets to a specified beneficiary for their lifetime, with the asset to be permanently disposed of only after the death of that beneficiary (sometimes referred to as a life tenant), at which time the life interest terminates.

In Daye v Daye Estate, 2023 NSSC 305, a recent decision of the Nova Scotia Supreme Court, the Court addressed the issue of whether a life interest could survive where the other assets of the estate are insufficient to fund payment of its liabilities.  One of two co-life tenants had taken the position that their life interest should stand, notwithstanding that it would delay (or prevent) payment to legitimate estate creditors, and sought to prevent the estate trustees’ efforts to sell the family property intended to be held subject to the life interest. Unsurprisingly, Justice Bodurtha had determined that the estate trustees were justified in their plan to sell the property in those circumstances, defeating the interests of the co-life tenants who received no compensation relating to the life interest that terminated early for reasons beyond their control. His Honour commented (at paragraph 38): “This is an unfortunate situation where there are not enough assets to pay the Estate’s debts without a gift abating.”

More recently, the Court considered the issue of the costs incurred by the co-life tenant applicant and the respondent estate trustees in the application relating to the sale of the property that was subject to the life interest.  Justice Bodurtha reviewed the broad discretion afforded to the judge in determining the issue of costs, as well as the modern approach to costs in estate litigation, in which the “losing party” can expect to pay at least some of the costs of the “winning party” rather than for the costs of both parties to be paid from the assets of the estate. Justice Bodurtha cited an article written by Ian M. Hull (“Costs in Estate Litigation“, (1998) 18 ETR (2d) 218), along with a number of other authorities, in determining that the costs of the co-life tenant who objected to the sale of the property should be required not only to pay her own costs but also those of the estate trustees ($32,000 of the approximate $38,000 claimed against her), which award was intended to “do justice between the parties.”

This decision serves as an important reminder that it is possible for an intended life tenant not to receive the interest of a life interest in property if there are liquidity issues. If an estate planning client wishes to provide the beneficiary of a life interest with some other benefit in the event that the property may need to be sold prematurely, it is best to explore corresponding terms that can be considered for inclusion in their will.

Thank you for reading,

Nick Esterbauer