Jack Haskew, head of our Wills, Lasting Powers of Attorney and Probate team, fields some of the key questions about life interest trusts, which are becoming increasingly mainstream.
Q: What exactly is a life interest trust?
Jack Haskew (JH) : A life interest trust is an arrangement whereby your Will provides for one beneficiary during their lifetime, but once that person dies, your assets are transferred 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 you purchased before meeting your current partner, you might be keen to ensure your children ultimately benefit from your home while being happy for your partner to receive the rest of your estate.
Q: Who typically might want to look at a life interest trust?
JH: 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. The reasoning always comes down to protecting assets for loved ones.
Q: Can you set a timeframe for a life interest trust?
JH: As the name suggests, a life interest trust typically remains in place for the remaining life of your initial beneficiary. You can, however, create one 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 your partner does not feel rushed out of their home without your children’s inheritance become tied up for too long.
Q: What are the main benefits of a life interest trust?
JH: Life interest trusts afford you greater control over the distribution of your estate. If you want to ensure 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 dies, they could leave their estate, including whatever assets they inherited from you, to someone else entirely.
Life interest trusts are also 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.
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.
Q: And what are the disadvantages?
JH: Any trust arrangement requires 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 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 you appoint suitable trustees.
Before making a Will with a life interest trust, you should always seek professional advice. Similarly, if you are the trustee of a life interest trust, you should seek advice to ensure you are always acting within your remit.
