For many couples, the family home is their biggest asset. It can also be the most emotionally complicated asset to deal with when one partner dies.

Complicating the situation further is tax. The main residence secures a CGT exemption, and the ATO allows a two-year grace period from the date of death to sell the home. If the asset is not disposed of within two years of death, it loses its CGT exempt status as a primary place of residence. This can reduce an estate by hundreds of thousands of dollars.

This is not an uncommon situation. Any complications or confusion about what to do with a property can delay a sale. These situations include any conflicts about what to do with the property in the first place – whether to sell it or keep it in the family.

Mortgages do not stop just because of the death of a family member. Beneficiaries in disparate financial circumstances mean some may be able to afford the mortgage, while others cannot. All of these variables can add delays to the disposal of a family home and disqualify the CGT exemption.

Adding an additional layer of complexity is a blended family. Imagine a couple who have been together for 15 years. One partner has two adult children from a previous relationship. The other partner has no children.

The home is owned solely by the first partner. When they die, their children expect to eventually inherit the property, but their surviving partner still lives there. They may have spent years building a life in the home and may have no desire - or financial ability- to move.

Simply leaving the house to the surviving partner might solve the immediate problem, but it does not resolve it entirely. The children may have to wait until their step-parent dies before receiving their inheritance. By then, the surviving partner may have changed their will, remarried or left the property to someone else.

I spoke to Estate Planning lawyer and founder of Estates Now Abbey John about a solution to this issue – a right to reside clause.

Right to reside

Abbey says the arrangement can be used to provide a surviving spouse with safety and security while preserving the eventual inheritance for other beneficiaries.

“The spouse wants to be able to live there and feel the relief of having a home, at least for a certain period of years.”

You don’t necessarily have to choose between the house and the children, as a right to reside can be written into a will so that a person has the right to live in a property for a specified period.

That might be two years, five years or, depending on the circumstances, for the person’s lifetime. At the end of the agreed period, the property can pass to the other beneficiaries under the will. That creates a middle ground between two common approaches.

The first is leaving the property outright to the surviving spouse. The second is leaving it directly to the children, potentially forcing the surviving spouse to sell or leave the home.

“The family home is a massive one, because everyone wants safety and security,” Abbey says.

If the property is solely owned by the deceased, there is no automatic transfer to the surviving spouse. The will needs to deal with what happens to the property. A right to reside can provide the surviving spouse with certainty about where they will live while also establishing what happens to the property afterwards.

For example, a will might provide that a surviving spouse can live in the property for five years. At the end of those five years, the property could pass to the deceased’s children.

The exact terms matter. A right to reside is not necessarily the same thing as giving someone ownership of the property, and the legal and tax consequences can differ depending on how the arrangement is drafted.

Interaction with the Capital Gains Tax exemption

Tax treatment is another reason to consider the structure carefully.

The general rule is that a qualifying dwelling inherited from a deceased estate can receive the capital gains tax main-residence exemption if it is disposed of within two years of the deceased’s death. There are also circumstances in which the exemption can apply where the property continues to be the main residence of the deceased’s spouse or an individual who has a right to occupy the property under the will.

This is particularly relevant when a right to reside allows someone to remain in the home beyond two years.

The ATO specifically recognises an individual with a right to occupy a home under the deceased’s will as one of the people whose occupation can be relevant to the main-residence exemption. There are conditions and different rules depending on the circumstances, including how the property was used, when it was acquired and who occupied it.

Abbey says this is one of the reasons the right-to-reside structure can be useful.

Where a surviving spouse has a legitimate right to reside and continues to occupy the property as their main residence, the CGT treatment can be different from a situation where the property is simply held as an investment after the deceased’s death.

The important point is that the will, the ownership of the property and the way the property is actually used all need to work together.

A right to reside isn’t just for blended families

A right to reside gives families the opportunity to make a distinction in their will – the right to live in an asset and the right to own it. Although the use case of a right to reside is clearest with a blended family, Abbey says it has been useful in many family situations.

For example, an elderly parent might want to ensure their partner can remain in the family home after they die, while ultimately leaving the property to their children. This helps to safeguard the property from future claims from potential beneficiaries that may not currently exist.

The arrangement can also be used where there are multiple properties and the family wants to allocate assets according to each beneficiary’s needs.

What happens when the right ends?

A right to reside needs to be carefully drafted. The will should establish who has the right to live in the property, how long that right lasts and what happens afterwards.

At the end of the period, the property might pass to the children or other beneficiaries. That can provide a surviving spouse with a degree of certainty without making them the ultimate owner of the asset. It can also remove some of the uncertainty that otherwise emerges after someone’s death. John says this is particularly important because the family home can become a source of enormous stress when there is no clear plan.

“There’s a lot of competing interests,” she says. A surviving spouse may be thinking about where they may live, and children may be thinking about when they will receive their inheritance. A well-constructed plan helps answer both of these questions and gives certainty to all parties.

The important part is having the conversation

A right to reside isn’t necessarily the right solution for every family. The appropriate structure depends on the family’s circumstances, the ownership of the property, the needs of the beneficiaries and the terms of the will.

The broader lesson is that estate planning doesn’t have to be an all-or-nothing decision. There can be arrangements that provide your partner with a secure place to live while preserving an eventual inheritance for your children.

The tax treatment can depend on the precise circumstances so it is worth getting legal and tax advice before putting the arrangement in place. It can save hundreds of thousands of dollars.

The most important step, Abbey says, is to think about what would happen if you weren’t there to explain your wishes. If the answer is unclear, your will probably needs more work.

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