Life interest trusts used to be relatively uncommon, primarily used by couples in second marriages to provide for their spouse whilst protecting their share of the family capital for the children from their first marriage.
These trusts are now regularly used to ensure that the half share of the family home that belongs to the first of two spouses or a couple to have died will ultimately end up with their children or family (even if the surviving spouse remarries) whilst providing the surviving spouse with the right to occupy the property during their lifetime.
This article answers some key questions about life interest trusts.
What is a Life Interest Trust?
A life interest trust provides the life tenant (usually the surviving spouse or partner) with the right to the income from assets in the trust and the right to live in any property in the trust. This usually also includes the right for the life tenant to sell the property and to require that the trust buys a replacement if, for example, they would like to relocate or downsize.
However, the life tenant does not have the right to the underlying capital value of the assets in the trust. This means the life tenant cannot spend or give away the capital and it is protected for the benefit of the remainder beneficiaries, typically the children of the person who created the trust.
What are some of the benefits of a Life Interest Trust?
Security
You can provide for your spouse or partner whilst being confident that the value of your estate will ultimately end up with your children.
Protection
A life interest trust protects the value of your estate if your spouse/partner enters a new relationship after your death or requires long-term care, as assets in the trust are not part of their estate.
Inheritance Tax
It will depend on your circumstances, but where your spouse is the life tenant and the capital will ultimately end up with your children, the inheritance tax consequences of a life interest trust are often no different to making an outright gift to your spouse.
What are some disadvantages of a Life Interest Trust?
Complexity
A trust adds a layer of complexity and removes some of the freedom the life tenant would have had if assets had been given to them outright. However, in our experience, once established, a life interest trust often runs smoothly with little impact on the life tenant’s day-to-day life.
Choice of Trustees
The trustees are responsible for the life interest trust and so choosing the right people is very important to avoid disputes or problems.
Inheritance Tax
A life interest trust can be less efficient from an inheritance tax perspective than other options, depending on your circumstances.
What are some of the issues to think about when creating a Life Interest Trust?
- Should the life interest trust apply to the family home or your entire estate?
- If a property is put into a life interest trust what will happen to any outstanding mortgage?
- How will the costs of running the life interest trust be met?
- Should the duration of the trust be limited in any way, for example for a set period of time or until the life tenant remarries?
As you can see, there are a number of issues to consider when deciding whether a life interest trust is right for you and if so, what the specific terms of the trust should be.
If you would like to find out more about life interest trusts please contact our Private Client team and we would be happy to discuss them with you as part of a review of your Will.