A life interest trust is a great idea when a person wants to protect their home for a future generation. This is typically when a person wants their home to be protected for their children from a current relationship or children from previous relationships but allow their current spouse or partner to continue living in the home until a certain event occurs, usually death.
Why such a trust could be advantageous:
- To avoid care home fees – when the survivor ends up needing care in a care home and the fees have to be paid from your home and
- To avoid the sideways’ disinheritance trap – when the survivor remarries and leaves the property to their new spouse inadvertently disinheriting the children.
The trust itself is an arrangement whereby the testator (the person making the will) appoints a ‘trustee’ – someone you trust who looks after and manages the arrangement for the testator’s chosen ‘beneficiaries’. You will need to appoint at least 2 trustees or 1 if acting in a professional capacity. Who you appoint will be an important decision as they will have full control over your property and money.
The person who has a right to occupy the property in the trust is referred to as the ‘life tenant’ and the ultimate beneficiary is referred to as the ‘remainderman’. The Trustees become the legal owners of the property and register their ownership at the Land Registry and their role is to make sure that the beneficiary receives the intended benefit.
The terms of the trust are dictated by the testator and usually allow the life tenant to live at the property if they pay for the outgoings and maintain the property. They can also include terms such as:
- allowing the trust to be transferred to an alternative property if both the trustees and the life tenant agree for example if they want to downsize;
- invest the full sale proceeds of the property to generate an income for the life tenant;
- invest part of the sale proceeds in an alternative property and the remainder proceeds to generate an income for the term or held for the remainderman.
The trust can continue until the death, remarriage or cohabitation of the life tenant or for any other fixed term. The idea is to ensure that the life tenant can continue living in their home for the remainder of their life without actually owning the property and ensuring that the property ultimately passes to the testator’s chosen beneficiaries.
Requirements for set up
Remember that your home has to be owned as tenants in common which means that your share of the property can actually be left and pass through your will. A property owned as joint tenants cannot pass under your will and automatically pass to the other owner by virtue of the rules of survivorship. A life interest trust has to be drafted into a will so that it is created on the death of the testator.
Before a life interest trust is set up, consideration should be given to the tax consequences. For the testator, the transfer into the trust can be exempt from IHT if made to a spouse or civil partner only and the surviving spouse or partner can further take advantage of the transferable nil rate band on their death. Additionally if the home was the main residence of the testator, then the threshold can be further increased by virtue of the residence nil rate band. A cohabitant is a non-exempt beneficiary and thus IHT may be due.
For the life tenant, whilst they are not entitled to the capital, the value of the trust property is added to their estate at the time of their death which will inevitably inflate their estate consequently having IHT implications.
If you would like more information on how Freeman Harris can assist you or your family with making a will or probate and estate administration, please contact our team on 020 7790 7311 or email us at firstname.lastname@example.org or email@example.com