Life Interest Trusts – What are they?
What is a Life Interest Trust Will?
A Life Interest Trust is a type of Trust that can be included in your Will. It allows you to specify who owns the rights to your family home – which can protect you and your family members should you need care in the future. It’s also a good way to preserve your assets and many people set them up for Inheritance Tax purposes.
Lifetime Trusts are particularly popular because they are very flexible compared with alternative options. In a situation where a couple is married, other similar trusts specify that all assets are passed to the surviving spouse automatically.
Lifetime Trusts allow for additional assets to be passed to other family members and beneficiaries.
The trust can be set up in advance but is in fact created upon the death of the first spouse. The Life Interest Trust then pays an income to the survivor, the life tenant, for the duration of their lifetime. When the life tenant eventually passes away, the trust is then transferred to their beneficiaries – usually children – with no Inheritance Tax to pay.
Funds contained within the Trust cannot usually be considered during a financial assessment should the survivor require care in the future. However, you should always check this point when you set one up.
Why would you want a Life Interest Trust?
A flexible Life Interest Trust enables you to allocate a beneficiary (usually yourself and/or a spouse or family member) who then has the legal right to receive income from or use a property named in the Trust. Lifetime Trusts are also known as ‘Interest in Possession’ Trusts.
Putting property in a Trust can sometimes help to guard against the impact of Inheritance Tax.
Who’s who in Life Interest Trusts?
Lots of legal terms will be used by solicitors. Here are the main ones you are likely to come across:
Settlor
The person who made the Trust.
Trustee
The trustee has the legal ownership of the Trust property, so often gets to make decisions about how capital is allocated. You can have more than one trustee, so trustees will have to make decisions together.
Beneficiary
The beneficiary or beneficiaries are ultimately entitled to benefit from the full value of the property. When the Trust is dissolved, the beneficiaries will get the full benefit of the Trust.
Life Tenant
A life tenant gets to live in the property and may get income from it; however, they are not entitled to the ultimate benefit, i.e. the value of the property. Life tenant’s entitlement therefore only continues during their lifetime.
Who are Life Interest Trust wills best suited to?
This type of Trust is best suited to couples – married or in civil partnership – who:
Want to preserve assets as much as possible for their beneficiaries (children and family members) but still want the life tenant to get to live in the property.
Want to make a Trust for inheritance tax purposes.
Want to ensure that no part of their family home can be used towards a financial assessment for care provision.
What are the advantages of Lifetime Trust Wills?
As with all financial products and trusts, there are advantages and disadvantages attached to a Life Interest Trust.
Advantages include:
Protection for your family home against a financial assessment for care home fees. This reduces the impact residential care home fees will have on your estate.
You can set up the Trust however you please, so you get more control over who gets what.
Powers which ensure that capital can be paid to nominated beneficiaries prior to the death of the surviving spouse.
Most Lifetime Interest Trusts can be converted into different types of trusts if required. This offers peace of mind in case your circumstances change, so the life tenant’s entitlement may be reduced if they remarry or get a new civil partner. You can give your trustees discretion over this.
You can be completely sure who will receive the value of your assets/property upon your death, whether this is your children or your surviving spouse.
You can ensure that your spouse is provided for upon your death whilst protecting capital for other family members in the future.
What are the disadvantages of Lifetime Interest Trusts?
There are also potential disadvantages – depending on your personal situation.
These include:
Full understanding and careful consideration of trustees is important. Your property will be legally owned by them.
A thorough review of the tax implications of setting up the Trust. You have to consider the impact of the nil rate band and who will face tax consequences. Some trusts will not provide significant tax relief until the death of the trustees and there may be several different types of tax liabilities applicable, including Income Tax and Capital Gains Tax.
If you divorce or remarry, or your circumstances change, the terms of the Trust may be affected.
You cannot create the Trust purely for the purposes of reducing care fees as this would be considered an unlawful disposition of assets.
Will a Life Interest Trust protect me and my surviving spouse from care home fees?
If the value of your estate is worth less than £23,250, the Local Authority will help with care fees. However, if you have more than this, you have to pay for your own care. Money in a Trust is often not considered as coming within your estate, so it does not come into the assessment.
However, you have to be careful with this, as you cannot create a Trust with the purpose of avoiding care fees; this is called deprivation of assets and can mean your estate is assessed anyway. Using solicitors can help you avoid this problem.
What is sideways disinheritance?
This is when the surviving spouse remarries and possibly has children. When the first spouse dies, all their estate will go onto their partner.
When the surviving spouse dies, all of the first spouse’s assets will then be passed onto the new spouse and children they had with this partner. Therefore, the children from the first marriage lose out. Setting up a Trust helps you avoid this problem. The surviving spouse can keep living in the family home, but then when they die, the value of the property will go to the children.
Can the surviving spouse downsize the house?
Nothing stops the life tenant from selling the house after the death of their spouse and using the capital to help them live elsewhere. Surplus funds will be held by the trustees, and ultimately the beneficiaries are entitled to receive the capital. However, if the life tenant is entitled to receive the income as well as being entitled to live in the property, they may be entitled to the value generated from selling the house too. However, this is limited to the income, not the actual property value.
What are the inheritance tax consequences of setting up a Life Interest Trust?
If your life tenant is the surviving spouse, then the trust property is seen as a gift and there are no tax consequences because of the spousal exemption. After the death of the surviving spouse, the transferable nil rate band can be used if the value of the property is below this.
How do I choose trustees of the Life Interest Trust?
You should choose someone you trust, as they will have the responsibility for making sure the beneficiaries get the capital value, and the survivor, also called the life tenant, gets an income from the Trust. You can appoint professional trustees, from solicitors or your bank, as they will be more independent.
How do I set up a Lifetime Interest Trust?
Setting up a Life Interest Trust can be a very complex process. The details will depend on your specific situation and wishes. Solicitors have the necessary experience and qualifications to enable you to set up a Trust.
What do you have to do before setting up a Trust?
Before your Trust is registered, it is required that you and your partner own your house as tenants in common, rather than joint tenants. Being tenants in common means you divide up the ownership of the property so it is half and half, rather than having ownership of the whole thing jointly.
Therefore, you can pass on your half of the property to the life tenant, rather than it going automatically to the other joint owner. A solicitor will need to make a notice of severance to change your ownership from joint tenants to tenants in common. This will be registered with the land registry.
How do I go about terminating a Life Interest Trust?
Some Trusts will terminate automatically, such as if someone dies or a beneficiary remarries. Also, often the trustees are given the power to change the life tenant’s income from the Trust or even to set up new trusts and sell assets. Otherwise, the arrangement is a legal document, so you should obtain legal advice to terminate it. You should get legal advice before this as there could be unexpected tax consequences.
What are the costs?
The costs for Life Interest Trust Wills start from £400 + VAT.
