Life Interest Trusts
A life interest trust can be a useful way to provide financial security for a surviving spouse, civil partner or unmarried partner after you pass away, and this means that it can be a vital option to consider when planning your estate.
If you and your spouse or partner co-own property, you can establish a life interest trust as part of your will. This means that, when you pass away, your partner receives a "life interest" in the property, but they do not inherit your half. They can continue living in the property but, when they die, the property passes to a third party as per the terms of your will.
This type of trust is often used by married couples or civil partners. It means that if one partner dies, the survivor will have an income or can continue living in the family home - but the trust retains control of the assets, which ensures that they will ultimately pass to the beneficiaries named in the original will when the life tenant dies.
This is not the only application for a life interest trust, so if you are planning your estate, it is worthwhile to consult an expert solicitor for advice on the trust structure that will best meet your needs, and the implications of your decisions for your Inheritance Tax liability.
The wills, trusts and probate team at Percy Hughes & Roberts Solicitors are experts in this area and can provide strong advice and legal services to help you establish a trust that meets your exact requirements for your estate. We can advise you on the tax implications of setting up a trust, choosing trustees, and the different trust structures that will best meet your needs.
If you have a query about life interest trusts and estate planning, or you need legal services relating to wills, trusts or probate, call us today for a no-obligation consultation over the phone. You can reach us on 0151 666 9090, or fill out our online enquiry form to arrange for a call back at a convenient time for you.
FAQs about life interest trusts
What is a life interest trust?
A life interest trust, also known as an interest in possession trust, is a type of trust used in estate planning. It is established by an individual (the settlor) who transfers assets into the trust for the benefit of another person (the life tenant) - in most cases, their share of a co-owned property. The life tenant receives an 'interest in possession', which usually means they have the right to income generated by the trust assets, or the use of the trust property, during their lifetime. Upon their death, the trust assets are passed on to the ultimate beneficiaries, as defined by the settlor - in legal terms, these final beneficiaries are called 'remaindermen'.
This kind of trust can provide substantial advantages for estate planning. One significant benefit is that it allows the settlor to provide for a loved one during their lifetime while retaining control over the ultimate distribution of the trust assets.
Furthermore, a life interest trust can protect any assets left in the trust from being depleted by the life tenant's creditors or in divorce proceedings. Consequently, a life interest trust can ensure a balance between meeting immediate needs and preserving assets for future generations. As the life tenant does not own the assets placed into the trust, the trust asset cannot be used if the life tenant is means tested; for example for receipt of benefits or the costs of care home fees.
Who can be the trustees of a life interest trust?
In the UK, almost any person can act as a trustee for a life interest trust, provided they are over the age of 18 and have the mental capacity to make decisions. This includes individuals known to the settlor, such as family members and friends, as well as professional advisors like solicitors. Corporate entities (such as banks) can also serve as trustees.
While the law allows flexibility and freedom in appointing trustees, it is vital to choose trustees that are trustworthy, competent, and likely to act in the best interests of all beneficiaries. The trustees will be responsible for managing the trust assets, making important decisions about investment strategy, and ensuring the life tenant receives their entitlements under the trust.
It is also important to consider whether there are likely to be conflicts of interest. There are no restrictions on whom you can appoint as a trustee, meaning that your trustees may include the life tenant or anyone else with an interest in the trust. As such, there is the potential that these trustees will make decisions in favour of their own interests, rather than the overall benefit of the trust or the beneficiaries.
Acting as a trustee can also be a long-term commitment and demand administrative skills and decision-making. Given these responsibilities, it is often advisable to seek professional guidance when selecting trustees. In many cases, the best approach is to appoint professional trustees. They will have no personal stake in the trust and can be relied upon to make decisions in the best interests of the beneficiaries without any conflicts of interest. They will also understand the responsibilities of the role and be able to fulfil their duties as a trustee in a way that will meet your requirements.
Can I appoint a trustee who is also a life tenant or a remainderman?
There are no restrictions on the settlor, the life tenant, or the remaindermen being trustees of a life interest trust. However, it is crucial to consider potential conflicts of interest. For instance, if the life tenant is also a trustee, they could potentially favour their own interests over those of the remaindermen. Often, it is best to appoint a professional trustee to manage the trust, as this will help you to avoid or mitigate these potential conflicts of interest.
Who can be a life tenant?
Any individual can be a life tenant of a life interest trust. The life tenant, also known as the 'income beneficiary', can be anyone the settlor chooses, be it a spouse, partner, child, friend, or other relative. It is entirely at the discretion of the settlor who they wish to benefit from the trust - you do not need to be married or in a civil partnership with the settlor to be named as a life tenant.
The life tenant has a legal right to the income generated by the trust assets or, in some cases, the use of trust property for their lifetime. This right is known as an 'interest in possession'. While there are relatively few legal restrictions on who can be a life tenant, it is important to note that the choice can have significant tax implications. Therefore, it is crucial to seek professional advice when setting up a life interest trust to ensure that you choose the right type of trust and that the structure is optimal for all parties involved.