What is a Life Interest Trust?
A life interest trust is a trust that is written into your Will and is a means by which you can provide future security for particular individuals, such as your spouse and children after you have passed.
In a life interest trust, the entitlement to an asset is split into its capital and income elements. For example, if the asset is an investment property, the capital is the property itself (i.e. its value), and the income is the rental income received from the property. The person you give the life interest to is called the ‘life tenant’, and they are entitled to the income from the assets in the life interest trust. Once the life interest comes to an end, usually when the life tenant dies, the capital passes to the ultimate beneficiaries you specify (called the ‘remaindermen’).
Who can benefit from a Life Interest Trust?
Most commonly, a Life Interest Trust is set up in the wills of couples (usually married couples or those in a civil partnership) concerned about care home fees or their partner remarrying, co-habiting, or entering into a civil partnership after they have passed. Suppose the estate (which usually includes a share in the family home) is left outright to the surviving partner. In that case, there is a risk that the property could end up in the hands of any future spouse or civil partner or its value depleted by care home fees for the surviving spouse. The Life Interest Trust ensures that the surviving partner has the security of having a home to live in during their lifetime, as well as the right to income from other assets in the estate, whilst ring-fencing the underlying capital, including the family home (or at least the share owned by the individual who initially left the life interest) for the deceased’s children.
Life Interest Trusts can also benefit couples in more complicated family structures such as second marriages and unmarried couples, and others who co-own property, such as a parent and child.
What are the advantages of a Life Interest Trust?
- You ensure your assets’ ultimate destination, including your share of a family home.
- A surviving spouse has the protection of being able to continue living in the family home and a right to income from other assets in your estate.
- Your share of the assets in the Life Interest Trust cannot be used to pay for any care home fees required for your surviving spouse.
- The underlying capital in your estate is protected from any future spouse or civil partner of the surviving spouse.
What are the disadvantages of a Life Interest Trust?
- The surviving spouse does not inherit the deceased’s share of the family home outright.
This may not be a problem for most, but for some, particularly if the family home is the only main asset they own, having access to only half its capital value could cause difficulties.
- Although most would prefer not to deplete the family home’s value to care home fees, not having access to the capital in the Life Interest Trust could affect the kind of care home the surviving spouse can afford.
Who should I choose as trustees for my Life Interest Trust?
In most Life Interest Trust cases, one trustee is usually the surviving spouse or partner.
For further discussion on who to appoint as trustee, please see our article.
How is the Life Interest Trust treated for inheritance tax?
If the Life Interest is left to the surviving spouse, the spousal exemption applies to the gift, and there is no inheritance tax to pay on the assets left in that trust.
The assets in the Life Interest Trust are treated for tax purposes as though they belong to the life tenant. If the Life Interest Trust comes to an end on the life tenant’s death, the assets in the Life Interest Trust are treated as part of the life tenant’s estate for inheritance tax purposes. If the Life Interest Trust ends while the life tenant is still alive, the life tenant is treated as making a gift of the assets in the trust.
How do I set up a Life Interest Trust?
There are several issues to consider when setting up a Life Interest Trust in your Will. These can include considering whether a Life Interest Trust is the best form of estate planning for your particular circumstances, changing title deeds, considering the full extent of the tax implications and drafting the Life Interest Trust clauses in the Will.
Private Wealth Solicitors
Our expert Private Wealth Team are here to guide you to find the best solution for your needs and prepare your Will accordingly. Please contact the team today on 020 7421 9421 (London) or 01483 451900 (Guildford). Alternatively, email sols@gordonsols.co.uk.