A Guide to Life Interest Trusts

Jenny Walsh

In today’s complex families, protecting assets for your children while ensuring that a surviving spouse can still enjoy them is a common concern. One way to achieve this is by setting up a life interest trust.

What is a life interest trust?

A life interest trust is a trust that is written into your will. It gives a named individual, usually the surviving spouse or partner, the right to receive income from the trust during their lifetime, while the assets themselves are held for the benefit of the ultimate beneficiaries, usually the children or grandchildren.

Life tenant

The person with the life interest is called the “life tenant.”

Remaindermen

Those who will ultimately inherit the assets when the life tenant no longer needs them are called “remaindermen.”

How do life interest trusts work?

In a life interest trust, the life tenant enjoys income from the trust, such as interest or dividends, as well as the right to enjoy any property within the trust, including the right to live in the family home. The trust can be set up so that the life tenant benefits from the trust assets for the rest of their life. Or, their interest may end when a trigger event happens. The usual trigger events would be if a surviving spouse remarries or goes to live in a care home.

When the life tenant’s interest ends, the assets can be distributed to the remaindermen according to the terms of the trust.

Why might I need a life interest trust?

Life interest trusts are a good way to protect your children’s inheritance for the future while ensuring that spouses and partners are well provided for. Most commonly, they are set up by individuals who are concerned about their partner remarrying after they have passed.

Lifetime trust example

Suppose, for example, that when you die you leave your estate outright to your surviving partner. If your partner starts a new relationship and has children, there is a risk that they leave their inheritance to their new family and your children will be left out of the will or have their share watered down. By setting up a life interest trust for them, you are ensuring that the inheritance goes to your own children without making life harder for your surviving partner.

Life interest trusts especially benefit couples in complicated family structures. These include second and subsequent marriages, unmarried couples, families with step-children and those who own property jointly with non-spousal family members, such as a parent and child.

Life interest in a property

Another benefit of life interest trusts is they can stop the value of the family home from being eroded by care home fees for the surviving spouse. When including a life interest in property clause in a will, the trust ensures that the surviving partner has a home to live in, whilst removing the home from their estate, which is means tested for care fees.

What are the advantages and disadvantages of a life interest trust?

Advantages of a life interest trust:

• You control your estate’s ultimate destination, including the family home.
• A surviving partner has the security of a home to live in and income from the trust assets.
• The assets cannot be used to pay for any care home fees required for the surviving spouse.
• The underlying capital in the estate is protected from the influence of a future partner if the surviving spouse were to remarry
• Flexible life interest trust – you can write the trust in a way that allows the life tenant to move to a smaller house if they wish, with any surplus from the sale of the family home either being invested to generate more income for the surviving spouse or paid out to the remaindermen.

Disadvantages of a life interest trust:

• The surviving spouse does not inherit assets outright and may feel vulnerable as a result.
• Not having access to the capital in the life interest trust may affect the kind of later-life care the surviving spouse can afford.
• There are additional formalities required in administering the trust which can be difficult for the trustees to manage.

How do I set up a life interest trust?

There are several issues to consider when setting up a life interest trust in your will. These can include:

• Whether a life interest trust is the best form of estate planning for your particular circumstances.
• Which assets will be assigned to the trust to ensure that the surviving partner will have enough income to live on.
• Changing the title deeds – if you wish to place a jointly owned property in a life interest trust, you will need to ensure that it is held as tenants in common so that each spouse owns a defined share of the property. This might involve severing a joint tenancy.
• The full extent of tax implications
• Who will act as trustees and what powers they will be given to ensure that decisions are taken in the best interests of all the beneficiaries. This needs careful consideration as trustees must strive to achieve a balance between maximising income for the life tenant and preserving underlying capital values for the remaindermen.

If setting up a life interest trust is something you are considering, it is advisable to seek legal advice from a qualified professional to ensure that your wishes are carried out properly. The team at Osbornes Law are experts in this area and can provide you with advice tailored to your individual circumstances, ensuring that your estate passes to the right people in the right way.

How we can help?

Set up a life interest trust today to protect your assets and ensure your loved ones are cared for according to your wishes. Contact us now to get started.

• Call 020 7485 8811, or
• Fill in the contact form below.