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This article was last updated on 1 October 2020.  

Life Interest Trust in 2020 – The definitive guide!

A Life interest trust offers a method of safeguarding your property and other financial assets. In this article we will explain:

  • What is a life interest trust?
  • Who are lifetime interest trusts suited to?
  • What is a life interest trust used for?
  • What are the life interest trust disadvantages and advantages?
  • How you can set one up?
  • Tips for choosing trust providers

Topics that you will find covered on this page

This article will cover the intricacies of life interest trust funds and explain how a life interest can be beneficial, who they are best suited to and why professional assistance matters when you decide to set one up.

If you are looking to use a trust to avoid care fees then we recommend that you watch this short video.

Why would you want a life interest trust?

A flexible life interest trust enables you to allocate a beneficiary (usually yourself and/or a spouse or family member) who then has the legal right to receive income from or use a property named in the trust. Lifetime trusts are also known as ‘interest in possession’ trusts.

Putting property in trust can sometimes help to guard against the impact of Inheritance Tax, which you can manage through estate management and planning.

What is a life interest trust will?

A life interest trust is a type of trust that can be included in your will. It allows you to specify who owns the rights to your family home – which can protect you and family members should you need care in the future. It’s also a good way to preserve your assets and many people set them up for Inheritance Tax purposes.

Lifetime trusts are particularly popular because they are very flexible compared with alternative options. In a situation where a couple is married, other similar trusts specify that all assets are passed to the surviving spouse automatically.

Lifetime trusts allows for additional assets to be passed to other family members and beneficiaries.

The trust can be set up in advance but is in fact created upon the death of the first spouse. The life interest trust then pays an income to the survivor, the life tenant, for the duration of their lifetime. When the life tenant eventually pass away the trust is then transferred to their beneficiaries – usually children – with no Inheritance Tax to pay.

Funds contained within the trust cannot usually be considered during a financial assessment should the survivor require care in the future.  However, you should always check this point when you set one up.

Who’s who in life interest trusts?

Lots of legal terms will be used by solicitors. Here are the main ones you are likely to come across:

Settlor 

The person who made the trust.

Trustee 

The trustee has the legal ownership of the trust property, so often get to make decisions about how capital is allocated. You can have more than one trustee, so trustees will have to make decisions together.

Beneficiary

The beneficiary or beneficiaries are ultimately entitled to benefit from the full value of the property. When the trust is dissolved, the beneficiaries will bet the full benefit of the trust

Life Tenant

A life tenant gets to live in the property and may get income from it, however they are not entitled to the ultimate benefit, i.e. the value of the property. Life tenant’s entitlement therefore only continues during their lifetime.

Who are life interest trust wills best suited to?

This type of trust is best suited to couples – married or in civil partnership – who:

  • Want to preserve assets as much as possible for their beneficiaries (children and family members) but still want the life tenant to get to live in the property. 
  • Want to make a trust for inheritance tax purposes
  • Want to ensure that no part of their family home can be used towards a financial assessment for care provision

What are the advantages of lifetime trust wills?

As with all financial products and trusts, there are advantage and disadvantages attached to a life interest trust.

Advantages include:

  • Protection for your family home against a financial assessment for care home fees. This reduces the impact residential care home fees will have on your estate
  • You can set up the trust however you please, so you get more control over who gets what
  • Powers which ensure that capital can be paid to nominated beneficiaries prior to the death of the surviving spouse
  • Most lifetime interest trusts can be converted into different types of trusts if required. This offers peace of mind in case your circumstances change, so the life tenant’s entitlement may be reduced if they remarry or get a new civil partner. You can give your trustees discretion over this. 
  • You can be completely sure who will receive the value of your assets/property upon your death, whether this is your children or surviving spouse
  • You can ensure that your spouse is provided for upon your death whilst protecting capital for other family members in the future

What are the disadvantages of lifetime trusts?

There are also potential disadvantages – depending on your personal situation. 

These include:

  • Full understanding and careful consideration of trustees is important. Your property will be legally owned by them
  • A thorough review of the tax implications of setting up the trust. You have to consider the impact of the nil rate band and who will face tax consequences. Some trusts will not provide significant tax relief until the death of the trustees and there may be several different types of tax liabilities applicable, including income tax and Capital Gains Tax.
  • If you divorce or remarry or your circumstances change the terms of the trust may be affected.
  • You cannot create up the trust purely for the purposes of reducing care fees.

Here is a short video that provides an example of a life interest trust.

Will a life interest trust trust protect me and my surviving spouse from care home fees? 

If the value of your estate is worth less than £23,250, the Local Authority will help with care fees. However, if you have more than this, you have to pay for your own care. Money in a trust is often not considered as coming within your estate, so it does not come into the assessment.

However, you have to be careful with this, as you cannot create a trust with the purpose of avoiding care fees, as this is called deprivation of assets, and can mean your estate is assessed anyway. Using solicitors can help you avoid this problem.

What is sideways disinheritance?

This is when the surviving spouse remarries, and possibly have children. When the first spouse dies, all of their estate will go onto their partner.

When the surviving spouse dies, all of the first spouses assets will then be passed onto their new spouse and children they had with this partner. Therefore, the children from the first marriage lose out. Setting up a trust helps you avoid this problem. The surviving spouse can keep living in the family home, but then when they die, the value of the property will go to the children. 

Use our robot to help learn about the different types of Trusts you can use. Chat to the robot below and it will tell you in about 1 minute.

lifetime trust

Can the surviving spouse downsize the house?

Nothing stops the life tenant from selling the house after the death of their spouse, and use the capital to help them live elsewhere. Surplus funds will be held by the trustees, and ultimately the beneficiaries are entitled to receive the capital. However, if the life tenant is entitled to receive the income as well as being entitled to live in the property, they may be entitled to the value generated from selling the house too. However this is limited to the income, not the actual property value.

What are the inheritance tax consequences of setting up a life interest trust?

If your life tenant is the surviving spouse, then the trust property is seen as a gift and there are no tax consequences because of the spousal exemption. After the death of the surviving spouse, the transferable nil rate band can be used, so if the value of the property is below this, there might not be tax.

How should I choose providers of flexible life interest trusts?

Flexible life trusts are offered through certain financial trust providers and must be made by a solicitor to be effective.

When choosing to opt for a trust fund it’s important to first make sure you have all the information and some sound legal and financial advice. This ensures that you are choosing the best product for you – a trust that fits your circumstances.

First, you’ll need to appoint a solicitor who is authorised and regulated by the SRA to advise you on the options available and create a watertight trust structure on your behalf. If you don’t have a solicitor that you know that specialises in this, we can help you. 

You may like to do some research online first and ask for impartial testimonials from family and friends who have been in a similar situation. Most legal professionals offer a trust fund set up at the same time as will creation or review for a fixed fee.

How do I choose trustees of the life interest trust?

You should choose someone you trust, as they will have responsibility for making sure the beneficiaries get the capital value, and the survivor, also called the life tenant, gets an income from the trust. You can appoint professional trustees, from solicitors or your bank, as they will be more independent. 

How do I set up a lifetime interest trust?

Setting up a life interest trust can be a very complex process. The details will depend on your specific situation and wishes. Solicitors have to set up the trust for it to be legally valid. 

For this reason, it’s very important to enlist professional advice from a reputable solicitor and/or later life financial advisor who specialises in trust funds. You may also like to consult family members if you wish to help you to make your decision.

If you would like our help in putting you in touch with a solicitor that has the legal skills to set up a trust will for you, please leave your details below.  We will then arrange for a legal specialist to give you a call.

What do you have to do before setting a trust up?

Before you a trust is registered, it is required that you and your partner own your house as tenants in common, rather than joint tenants. Being tenants in common means you divide up the ownership of the property so it is half and half, rather than having ownership of the whole thing jointly.

Therefore you can pass on your half of the property to the life tenant, rather than it going automatically to the other joint owner. A solicitor will need to make a notice of severance to change your ownership from joint tenants to tenants in common. This will be registered with the land registry. 

flexible life interest trust

How do I go about terminating a life interest trust?

Some trusts will terminate automatically, such as if someones dies or a beneficiary remarries. Also, often the trustees are given the power to change the life tenant’s income from the trust or even to set up new trusts and sell assets. Otherwise, the arrangement is a legal document, so you need solicitors to help terminate it. You should get legal advice before this as there could be unexpected tax consequences. 

What other types of trusts can you use?

You are not limited to setting up a life interest trust, there a range of different trusts that you can use, and they are all worth exploring so that you can identify which one is likely to be the best one for your circumstances.  These include:

Asset Protection Trusts

An asset protection trust is a tool for managing your estate to make sure your assets go where you want them to after you die. It is a that trust is set up during your lifetime and put house in trust, and assets in the trust are distributed quickly to the beneficiaries once you pass away. You retain a life interest in property .

Family Protection Trusts

A family protection trust gives you a legal option where you have full access to the assets in the trust while you are alive, but you get to choose who will inherit from the trust fund.

Inheritance Tax Planning Trusts

Inheritance tax planning trusts can set up a trust to help you manage what will happen to your property after your death.  

Not only can a trust help reduce the inheritance tax you and your beneficiaries will pay, but they are also a useful tool for asset preservation and to give you flexibility in how you manage your finances. However, it is worth getting advice on setting up a trust.

Home Protection Trusts

A home protection trust protects your rights to reside in your family home. Having a trust makes sure that the property passes on to your beneficiaries after your death.

You could also consider giving your property as a gift to a person during your lifetime, instead of setting up a trust. This can have tax benefits if it is done enough years before your death, as it may mean your estate comes below the nil rate band. However they must be someone you trust, as one you given them the property, they can do whatever they please, including if they want to sell the property you wanted the life tenant to live in.

Would you like some help discussing which type of Trust you should use for your circumstances?

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We offer a free consultation to discuss your circumstances and see what options you have:

  • regarding avoiding or mitigating your care fees 
  • how you can safely, and legally, pass your home and assets to your family
  • how to reduce your inheritance tax liability.

If you would like some help, please leave your details below and someone will be in touch.

Or you can call us now on 01442 953 901

We work with with Quadrant Estate Planning for them to bring you their market leading later life planning support. 

Meet the author

Rob Atherton

Rob Atherton

Rob writes and edits the content produced by the rest of the team. He has a degree in History from Leeds University and has producing, reviewing and editing the site since 2016

Meet The Team

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