Making sure your property passes as you choose, with a life interest trust
Creating a will with a life interest trust over your property allows you to ensure that your home passes to those you choose, whilst also allowing you to provide for another loved one during their lifetime.
‘Life interest trust wills are particularly popular with couples who have children from previous relationships, such as those in second (or third) marriages. They can also be useful to couples who have married later in life having already established independent lifestyles, and those with dependent siblings or elderly parents,’ says Dagmara Kulczykowska, a Partner in the Private Client Services team. ‘There are many circumstances in which someone may want a life interest trust in their will, but the reasoning always comes down to protecting assets for loved ones.’
What exactly is a life interest trust?
A life interest trust is an arrangement whereby your will provides for one beneficiary during their lifetime but, once that person passes away, your assets are transferred over to someone of your choosing, rather than in accordance with your lifetime beneficiary’s wishes.
A life interest trust can be created in respect of your entire estate, or in relation to only one (or several) specific assets. For example, if you have children from an earlier relationship and a property that you purchased before meeting your current partner, you might be keen to ensure that your children ultimately benefit from your home whilst being happy for your partner to receive the rest of your estate.
As the name suggests, a life interest trust typically remains in place for the remaining life of your initial beneficiary. You can, however, create a life interest trust for a set period, such as five years, or until a certain event occurs. If your children and your partner are a similar age, you might not want your children to have to wait a long time before receiving their inheritance, or risk them predeceasing your partner and missing out altogether. In such a case, a set period could be sufficient to ensure that your partner does not feel rushed out of their home without your children’s inheritance become tied up for too long.
Benefits of a life interest trust
Life interest trusts afford you greater control over the distribution of your estate. If you want to ensure that your partner has access to your assets during their lifetime, you could simply leave your estate to them absolutely. However, in doing so, you also give away total control of those assets. When your partner passes away, they could leave their estate, including whatever assets they inherited from you, to someone else entirely.
Trusting your partner to adhere to your wishes might not be enough. There are circumstances in which their estate could pass without their own control, such as if they were to die intestate because they simply forget (or never get around to) making their own will. If your partner marries after having received your estate, that marriage would typically revoke any will they made previously, meaning that they could be left intestate without even realising.
Aside from the effects of intestacy, life interest trusts are a useful tool in protecting your assets from the bankruptcy or divorce of beneficiaries. If you leave assets directly to someone who later becomes bankrupt, or who later divorces, those assets would be deemed their own for the purpose of bankruptcy or divorce proceedings. It may be your lifetime beneficiary who you have concerns about in this regard, or it could be those you intend to leave your assets to ultimately. For example, if one of your children is going through a divorce, any assets held for their benefit in a life interest trust cannot be considered as part of the proceedings and will, therefore, be safe from that child’s former spouse.
Some life interest trusts are created not to save assets for children, or other loved ones, but to protect vulnerable beneficiaries. You might want to leave your estate to a sibling who is unable to manage their own finances independently, or who is in receipt of means tested benefits. Placing your estate in a life interest trust, with that person as the lifetime beneficiary, allows the trustees to provide for their needs, without that person having to manage the money or risk losing their benefits.
Disadvantages of a life interest trust
Any trust arrangement does, by its nature, require a greater level of administration. Trusts can also attract complex tax rules. A life interest trust over an entire estate which receives a regular income and potential capital gains, as well as requiring frequent capital payments to be made for the lifetime beneficiary, are usually more costly to manage than a life interest trust over a family home in which the lifetime beneficiary lives. However, it is important that your trustees ensure they are complying with all the legal and tax requirements of your trust arrangement. With this in mind, it is equally important that you ensure you appoint suitable trustees.
Before making a will with a life interest trust, you should always seek professional advice as to the various implications. Similarly, if you are the trustee of a life interest trust, you should seek advice to ensure that you are always acting within your remit.
How can we help?
Life interest trusts are a popular and effective way of ensuring your estate passes exactly as you wish, but you must make sure that the type of life interest trust you desire is, and the trustees you intend to appoint are, appropriate.
Our solicitors can advise you on creating a life interest trust in a way that ensures your choices are clear and legally binding, as well as advising you or your trustees as to the requirements of managing a life interest trust.
For further information, please contact Dagmara Kulczykowska in the Private Client Services team on 01908 689341 or email firstname.lastname@example.org. You can also download a Property Life Interest Trust Will Factsheet.
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.