What is a Life Interest Trust Will?

A Life Interest Trust Will (or Life Interest Trust) in England and Wales is a legal arrangement that allows a person (often a spouse or partner) to benefit from certain assets or property during their lifetime while preserving the ultimate inheritance for other beneficiaries.

This type of trust is commonly used in estate planning to ensure that a surviving spouse or partner is taken care of while safeguarding the long-term interests of other beneficiaries, such as children from a previous relationship.

Key Terminology

• Life Tenant: The life tenant is the person who benefits from the life interest, often a surviving spouse or partner. They have the right to benefit from certain assets (such as income generated by the trust) or to live in a property for their lifetime, but they do not own these assets outright.
• Trustees: When a Life Interest Trust is created through a Will, trustees are appointed to manage the trust. The trustees hold the assets on behalf of the life tenant and manage them according to the terms set out in the Will.
• Remainder Beneficiaries: After the death of the life tenant, the assets in the trust pass to the remainder beneficiaries—typically children or other named individuals. These beneficiaries receive the capital or property outright.

How It Works

A typical scenario involves placing a home in a Life Interest Trust. For example, one spouse might leave their share of the home in trust for the surviving spouse to live in during their lifetime. Upon the surviving spouse’s death, the home (or its value) passes to the children. This ensures that the surviving spouse has a place to live while protecting the interests of the children.

Additionally, a Life Interest Trust can apply to other assets, such as savings or investments, where the life tenant is entitled to receive income generated by those investments while the capital is preserved for other beneficiaries.

The terms of the trust can be tailored to suit specific needs. For example, the Will can specify that the trustees have the authority to sell the property and purchase a new one if the life tenant needs to move.

The testator can change or revoke the terms of the trust during their lifetime, but it cannot be altered after their death without following the legal process for varying a Will.

Advantages of a Life Interest Trust Will

• Asset Protection: A Life Interest Trust helps protect assets for future generations. This is especially important for blended families, where the testator wants to provide for their spouse while ensuring that children from a previous relationship eventually inherit.
• Mitigating Care Costs: By placing part of an estate in a Life Interest Trust, it can help avoid or reduce the impact of means-testing for care home fees, as only the life tenant’s share of the home (if any) is considered. However, local authorities may view this as “deliberate deprivation of assets” if it appears to be a strategy to avoid care home fees. Therefore, it is crucial to seek legal advice to ensure that your Will is drafted correctly.
• Inheritance Tax (IHT) Planning: While the assets in a Life Interest Trust are often treated as part of the life tenant’s estate for Inheritance Tax purposes, it can help manage tax liabilities depending on how the trust is structured and the overall estate planning strategy. Again, seeking legal advice is essential in this context.

Conclusion

A Life Interest Trust must be set up carefully through a Will, and it is advisable to consult a solicitor to ensure that it accurately reflects the testator’s wishes and complies with legal requirements.