A life interest trust is established in order to provide a beneficiary the right to receive income, or a benefit (ie by living in the property), from the trust. The beneficiary is known as the ‘life tenant’ and is typically given the right for their lifetime, hence the name. On the death of the beneficiary, the trust fund is then passed on to the other named beneficiaries, known as the ‘residuary beneficiaries’.
So using an example of a married couple with children where both parties want the surviving spouse to be able to continue to live in the family home for their lifetime, and then want their children to inherit the property on death of the second parent. The husband dies first and in his Will he puts his half of the family home into a trust with the children as beneficiaries, and at the same time gives his surviving spouse a life interest in that half of the property. The surviving spouse continues to live in the family home, and of course still owns a half share of the property herself. When she dies, the trust fund passes to the children as intended. This way the trust has allowed the husband to pass his assets to the next generation whilst providing a benefit to the current one. Further down I talk about the significant tax benefits of using this type of trust, but first let’s look at some other reasons why you might want to use a trust like this.
It might be used to keep a business in the family by holding the shares in the trust. Or you may have concerns your spouse could re-marry after your death and their new family may inherit your assets. Alternatively, if you were the surviving spouse, you could be the one remarrying and your new spouse may also have children. A trust could help you provide for your new spouse while still passing your assets to your children as intended. Lastly, as we are living longer, many people have concerns around future care fees. A trust could help to prevent you from having to sell your home by ringfencing all or some of it by using a trust. Early advice here is critical.
A trust can hold most types of assets, but typically assets would consist of property, cash, shares or other investments. Typically people create a trust during their lifetime to transfer cash or investments for the preferential tax efficiencies a trust can offer. When done through a Will however, it’s usually all or a share of a person’s estate, or their share of the family home that is placed into trust with a nominated beneficiary receiving a life interest in the property.
So what are the benefits of creating a trust through your Will?
Using the example above, a trust through your Will creates an immediate post death interest, and the life tenant can then live in the property for their lifetime. If the life tenant is a surviving spouse there is no Inheritance Tax to pay when the trust is set up, as they would benefit from spousal exemption.
Other benefits are that there no ten-year anniversary charges, a significant saving when compared to creating a trust during your lifetime. Further, it offers flexibility should the life tenant decide to move or downsize. If the property is sold, as long as the life tenant lives in the property as their principle private residence, it’s not subject to Capital Gains Tax. The trust could be used to purchase a new property, leaving the life tenant to use their share of the proceeds as they wish.
This information provided in this article is not intended to constitute legal advice and each relationship breakdown requires careful consideration in our view by a fully qualified Solicitor before decisions are made and before you embark on a certain course of action.
Nino Cuffaro – Wills, Trust and Probate
T: 020 7183 1485