Should I consider including Life Interest Trust provisions in my Will?

By Hannah Borner Webster

Partner

31 July 2024

Article Insights

A ‘Life Interest’ Trust is a Trust which provides someone, most commonly a surviving spouse or civil partner, with the right to benefit from assets for the rest of their life (or until another specified event occurs). The use of such trusts is a popular way of ensuring a surviving partner is provided for, whilst also protecting your assets so that they ultimately pass to your intended beneficiaries.

It is common for a married couple or civil partners to prepare Wills which leave everything to the survivor of them outright when the first of them dies, with everything passing to the children on second death. However, people often worry that, following their death, their spouse or civil partner will meet a new partner and subsequently change the terms of their Will so that assets pass to the new partner rather than to their children. Alternatively, couples might have children from a previous relationship and want to ensure that, if they die first, their new partner will be able to continue living in their home and perhaps also continue to receive any income produced by other assets, whilst ensuring that after their partner’s death, their own children will ultimately benefit from their estate.

Life Interest Trusts can be very useful in these scenarios. The trust provisions are included in the Will and set out that when the first of a couple dies, assets of their choosing (often their share of their home) will be held on trust for the benefit of the survivor. The survivor is entitled to benefit from the assets held within the trust and so they can continue living in any property held within the trust rent free (though they are responsible for keeping the property in good condition and insured) and will receive any income produced by assets held within the trust, such as rental income, interest and dividends. Crucially, though, the capital value of the assets held on trust does not belong to the survivor and is instead held by the trustees.

The trust can be made flexible so that the trustees have the power to make appointments of capital, both to the surviving partner and to the ultimate beneficiaries, before the trust comes to an end. The trustees can also be given the power to sell any property held within the trust and use the sale proceeds to purchase a replacement property, which the surviving partner can then live in. You can decide how many of these powers you wish to include, and so the trust can be made as flexible or as restrictive as you wish.

The surviving partner can be appointed as one of the trustees and many choose to also appoint the ultimate beneficiaries as trustees, so that all those who are to benefit from the trust are involved in decisions. The trustees should, though, be chosen carefully, and if there is a potential for disagreements, it is sensible to consider appointing an independent trustee, or perhaps a professional, to avoid the risk of lengthy and expensive Court involvement to sort out disagreements.

When the surviving partner’s life interest comes to an end (on their subsequent death, or if another event specified in the Will occurs, such as the remarriage of the surviving partner), the assets which remain within the trust are distributed to the ultimate beneficiaries (rather than under the terms of the surviving partner’s Will) and the trust comes to an end.

From an inheritance tax perspective, anything which passes into the Life Interest Trust is treated as passing to the survivor outright, so that anything passing into the trust for the benefit of a spouse or civil partner will be exempt from inheritance tax. When the surviving partner dies, the value of the assets remaining within the trust will form part of their own estate for inheritance tax purposes. This may, though, be offset by the nil rate band and the residence nil rate band (see below) of the first to die, which can be transferred between married couples and civil partners if it is unused on first death.

Any distributions from the trust during the lifetime of the survivor will be treated as ‘potentially exempt transfers’ so that if the survivor dies more than 7 years after the distributions, they will fall outside of their estate, but if they do not survive the distributions by 7 years, the value of those distributions will be taken into account when valuing their estate for inheritance tax purposes.

From the perspective of the residence nil rate band, assets are treated as passing from the estate of surviving partner to the ultimate beneficiaries. Provided the ultimate beneficiaries are the children (or grandchildren, great grandchildren etc.) or step-children of the surviving partner, the residence nil rate band will still be available.

If the first to die and surviving partner were not married, the assets passing into the life interest trust will be subject to inheritance tax when they pass into the trust on first death, and again when the surviving partner dies, and so the use of a life interest trust may result in the same assets being subject to inheritance tax twice. If the ultimate beneficiaries are not the children of the surviving partner, putting your home into a life interest trust may also prevent your estate from benefitting from the residence nil rate band. It is important, therefore, to take advice before deciding whether to include Life Interest Trust provisions in your Will, to make sure that there are no unintended inheritance tax consequences of doing so.

Life Interest Trusts are a useful way of protecting assets and ensuring that they will ultimately pass to your intended beneficiaries, once the surviving partner has finished benefiting from those assets. The payoff is the administration of the trust, and the lack of flexibility for the survivor, who will need to ask the trustees before anything can be done with the assets held on trust. Ultimately, it is for couples to decide whether the level of protection offered by Life Interest Trusts is worth the loss of freedom for the survivor.

If you would like to discuss the benefits of utilising a life interest trust and what situation it is best to do so in, our Private Client team would be happy to help. Please visit the contact page to speak with us.

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Please note that the contents of this article are intended solely for general information purposes and should not be considered as legal advice. We cannot be held responsible for any loss resulting from actions or inactions taken based on this article.