Life Interest Trusts are often used in Wills as a useful estate planning tool.
A life interest trust gives a right for someone (the beneficiary) to ‘enjoy’ assets for their lifetime without being the actual owner. They are often used in Wills, and in particular in relation to houses – for example allowing a surviving spouse to remain in the property for the duration of their life.
How does a Life Interest Trust work?
A life interest trust gifts assets (often a house) to a trust from which a named beneficiary (known as the ‘life tenant’) can ‘enjoy’ that or those assets for a defined period. Enjoying means take the benefit of that asset so for example live in the house; or take the income from the investment.
What is an Interest in Possession Trust?
This is simply the ‘correct’ name for a life interest trust. Life interest trust is the more commonly used name.
Does the Life Tenant of a Life Interest Trust own the assets?
No! The assets are owned by the trust – and the life tenant is simply allowed to ‘enjoy’ the benefit of the assets.
Why are Interest in Possession Trusts called Life Interest Trusts?
The commonly used name of ‘life interest trust’ is likely to have derived from the fact that the beneficiary’s ‘enjoyment’ is often defined as being for their own lifetime. The trust period does not however have to be for the lifetime of the life tenant.
Do Life Interest Trusts only apply to Wills?
No! You can set up a life interest trust during your lifetime too – though they are perhaps most commonly used in Wills. An interest in possession trust set up during your lifetime is called an ‘inter vivos’ trust – as opposed to a ‘testamentary trust’ (which is a trust in your will).
Who administers a Life Interest Trust?
Whether set up in your Will, or during your lifetime in an inter-vivos settlement, you must appoint trustees who are responsible for administering the trust.
Can a Life Interest Trust be for a period other than the lifetime of the Beneficiary?
You can define the period of the trust, and or also include ‘trigger events’ that would then bring the period to a close. Put another way, it is not just the death of the life tenant that needs to bring it to a close.
Who gets the assets when the Life Tenant dies?
Your will or lifetime trust settlement will define who gets the assets after the life tenant dies (or some other trigger event happens. These beneficiaries will typically then take the capital value of the asset(s) outright and the trust will end. These final beneficiaries are known as ‘remaindermen’.
Is a Life Interest Trust a good idea?
Good question! And it really depends on your particular circumstances. The starting point is to think what do you want to achieve? Start with the objective, not the answer!
An expert estate planning and wills solicitor will help guide you through the pros and cons, and hopefully make the right decision.
What is the advantage of a Life Interest Trust?
The most common use of a life interest trust is to safeguard assets ending up with certain people (remaindermen), whilst allowing someone else (the life tenant) to enjoy them for a defined period of time.
What are the disadvantages of a Life Interest Trust?
The common disadvantages of life interest trusts include:-
- Expense of setting up
- Expense of administering
- Can restrict the freedom of the life tenant (see below)
- Can go on for many years meaning remaindermen get nothing for a long time
The suitability of a life interest trust is something specific to you, your circumstances, and your estate planning objectives.
Life interest trusts are often used in second marriages to allow the surviving spouse to remain in the matrimonial home.
Why do I need a Life Interest Trust?
A very common situation in which life interest trusts are used is in second marriages with blended families – particularly where there are no children in the second marriage. And, it will often only relate to the matrimonial home.
The objective here is to ensure that the surviving spouse can remain in the property after the first death, but with a guarantee that the deceased’s half share will go their own blood children as ‘remaindermen’ when their surviving spouse dies (or for some other reason the trust comes to an end).
This assumes that the couple own the house jointly and as tenants in common – NOT joint tenants. In that scenario, on the death of the first spouse, the survivor would then typically still own their own share, and would become the life tenant of the share of their deceased spouse. They would be able to remain in the property in accordance with the terms you set out in the trusts.
One disadvantage that this example highlights is the ‘freedom’ of the surviving spouse. This is restricted as the trustees own the half of the house that their late spouse previously did. So, if the life tenant wants to move, they have to hope that the trust allows this, and that the trustees consent!
Why does a Life Interest Trust end?
In the example above of an interest in possession trust being used in the wills of a couple on second marriage, ‘trigger events’ are often included which will end the trust other than just the death of the life tenant. These might include things such as remarriage, or co-habiting. You should be careful to make sure that any such trigger events are clearly defined to avoid ambiguity or dispute.
Can I move house in a Life Interest Trust?
It is important that the trust (your will or lifetime settlement) clearly defines what can and cannot happen. So for example, can your surviving spouse move and use the sales proceeds to buy another property. Make sure these sorts of things are covered off clearly in the terms of the trust.
What if the Life Tenant goes into Care?
Again – something to make sure you make clear in the terms of the trust. More particularly, could the or a house be sold and the sales proceeds be used by the life tenant for care, or indeed anything else.
Are Life Interest Trusts liable to tax?
Yes, interest in possession trusts are potentially liable to income, capital gains, and even inheritance tax. You should seek independent tax advice on the issues that tax might raise.
Who pays Inheritance Tax on a Life Interest Trust?
Oddly (perhaps), when a life tenant dies, their own estate will be deemed to include the value of not only their own assets, but also the assets that they were able to ‘enjoy’ under the trust. This, despite them not being the outright owner! However, the proportion of inheritance tax attributable to the trust is paid by the trustees, not from the estate of the deceased life tenant (their executors).
The Revenue’s rationale on this is that as a life tenant we enjoy the capital value of the assets, and so they should be taxed as such.
Need more advice on Life Interest Trusts?
If you are thinking about setting up an interest in possession trust do reach out to our expert estate planning and wills solicitors. Setting up a trust is not a step to take lightly, and one that you should only do after having taking legal advice specific to you, your circumstances, and your estate planning objectives. You can reach out to the team by calling us on 03300 020 365, or by emailing firstname.lastname@example.org.