Life Interest Trusts in Wills

A Life Interest Trust in a Will is a very useful tool for protecting against the ever-rising costs of care home fees, as well as providing much needed peace of mind to individuals who wish to provide for their spouse or civil partner in their lifetime, but ultimately wish to leave assets to other beneficiaries such as children. They are becoming increasingly popular for many reasons and this article aims to shed some light on what they are, how they work and whether they could be right for you.

What is it?

A Life Interest Trust is created by your Will and comes into effect on the death of the first partner. The Will leaves assets into a trust which a nominated person (known as a life tenant) can benefit from during their lifetime, but on their death those assets will pass to someone else (known as the remaindermen.) Most commonly, Life Interest Trusts appoint the surviving spouse or civil partner as the life tenant and children as the remaindermen.

For example: the first spouse passes away leaving their share of the family home into a life interest trust. The second spouse has the right to live in the home and receive any income earned from that property for the rest of their life. When they pass away, the first spouse’s share will then pass to their chosen beneficiary, usually their children.

You can choose which assets you wish to place into the trust. It is common to include a share of a property, but can also include personal belongings, shares and investments. The Trust can be drafted flexibly, to allow that spouse to take income from those assets, such as rental income or share dividends, or they could take capital e.g. if the property was downsized. This will depend on your circumstances and preferences.

Why should you create a Life Interest Trust?

• Protection of assets against care home fees: rising costs of care home fees are a very common concern, particularly for those in retirement. By placing your assets into a trust on death, rather than passing to your chosen beneficiary directly, the surviving spouse is not deemed to own that asset. This means that when local authorities assess means for care fees, they cannot take into account assets which are held in trust. For example, if married couple Tim and Sarah each owned a 50% share of a property worth £800,000 and Tim passed away leaving his share of the property into a Life Interest Trust for the lifetime of Sarah (the life tenant), Sarah would not be deemed to own that share. If Sarah needed to go into care, Tim’s £400,000 share would effectively be ringfenced against care home fees, and only Sarah’s share could be taken into consideration.
  
• Greater control: you can ensure that a loved one benefits from your assets during their lifetime, knowing that your remaindermen (usually your children) will take the assets when that loved one passes away. This is particularly useful for a couple who are in their second marriage, who each have children from a previous relationship that they would like to benefit from their estate. You may trust your spouse to provide for your children after your death, but sometimes circumstances arise that mean your children lose out, especially if your spouse were to remarry. Life Interest Trusts allow you to retain control over your estate.
  
• Protecting vulnerable beneficiaries: a beneficiary who has the right to assets or property for the rest of their lifetime will be protected but will not ultimately have full control over those assets – that control remains with the trustees of the trust. This can therefore be a flexible tool for a child or partner who perhaps lacks capacity, or cannot control their own finances. It will also assist in ensuring that person’s benefits are unaffected by a windfall of inheritance.
  
• The life tenant has security and income: and in particular can remain in the family home.
  
• Flexibility: the trust can be drafted to include different assets, could be limited to a specified period of time, can include capital or just income and can allow the life tenant to downsize and invest the surplus.
  

What are the disadvantages?

• The Lifetime Beneficiary will not own the assets: not owning the asset will limit what that lifetime beneficiary can do with it. It may therefore not be suitable for a beneficiary who is likely to long outlive you, or if you want them to have more control.
  
• Trusts are more complex: there will be more administration involved which may be difficult for the trustees to manage on their own. The trust would need to be registered and there may be potential income and capital gains tax consequences depending on the duration of the trust and what happens within it. A Grant of Probate would be required in order to transfer the property into the trust via the Land Registry.

Contact us

If you would like further information about Life Interest Trusts, how they work and whether they could be suitable for you, please contact Kate McLauchlan on 01494 781362 or email kate.mclauchlan@blasermills.co.uk.