What is a life interest trust?

When a life interest trust is set up, you will specify who will receive the life interest. That person is referred to this as the ‘life tenant’ and will benefit from the trust property for their life or until a specified event occurs. You will also indicate one or more beneficiaries who will become absolutely entitled to the trust assets after the life tenant’s death, or on the occurrence of the specified event. These beneficiaries are referred to as ‘remainder-men’.

The life tenant’s interest generally entitles them to income generated by trust assets, and allows them the use of the assets (for example, if a house is contained in the trust they might be granted the right to live in that house). The life tenant does not have any control over where the trust assets will pass after their death or access to spend capital.

An example of using a Life Interest Trust

An example of where a life interest trust is useful is where a couple live in a house which only one owns. Both have children from a previous relationship and the person who owns the house wishes to give the house to their children, not the children of their partner. However, in this circumstance the person who owns the house does not want to leave their partner without somewhere to live on their death.

If a life interest trust is created, the owner of the house would name their partner as the life tenant and their own children as remainder-men. Therefore, the partner could live in the house for the rest of their life but the house would ultimately pass to the owner’s children once the partner passes away.

Reasons to use a Life Interest Trust

• Life interest trusts are useful for estate planning. They help address concerns that your spouse could remarry and pass your assets to their new partner or new partner’s family.
• Life interest trusts provide a way of controlling who will ultimately inherit certain assets from you but whilst also allowing another person to benefit from an asset while they are still alive and potentially in need of that asset or the use of it.
• Life interest trusts can assist with concerns where there is a general desire to protect and “ring-fence” assets.
• Life interest trusts can be drafted to allow a greater degree of flexibility. For example, you may include powers that allow your trustees the power to end a life interest prematurely or use them in conjunction with wider discretionary powers. This is useful if the remainder-men become in need of capital.

Taxation of Life Interest Trusts

There may however be circumstances which trigger inheritance tax becoming payable and advice should be sought when utilising a life interest trust.

The information contained in this update is for general information purposes only and is not legal advice, which will depend on your specific circumstances.