Asset protection is becoming increasingly important and relevant to many people, particularly for those with blended families. Those that have remarried may be concerned, for example, that their children will not be adequately provided for in due course. For some it may be risky/undesirable to leave everything to the surviving spouse in the hope that they will ‘do right’ by the children when the time comes.
A life interest gift in the Will can be a helpful solution to this problem. This type of trust allows assets to be placed into trust for the benefit of your surviving spouse (or civil partner) for their life. The spouse is entitled to the income from the trust fund for the rest of their life, or if the trust fund contains property, the spouse would be entitled to occupy the property.
With a “true” life interest trust the spouse is not entitled to the capital of the trust fund. This is protected for your ‘remaindermen’ – who could be your children for example.
It is possible to have a more flexible life interest trust, which gives your trustees the power to advance capital to the surviving spouse if appropriate. Whether or not these flexible powers are included will depend on individual circumstances.
What assets can I put into the trust?
Many people choose to limit the life interest trust to their share of the home. The typical scenario is that of a husband and wife who own their house jointly. They each have children from a previous marriage. They wish to protect their respective half shares of the property, ultimately for their own children. They each leave a life interest to each other in their share of the property, with their own children being the remainder beneficiaries. The surviving spouse (the life tenant) can continue occupying the property (often there is the power to downsize to a smaller property) or they can have the income from the trust’s share of the property. They cannot spend the capital though (although the trust may give the trustees power to advance capital) this is protected for the remainder beneficiaries. When the life tenant dies, the trust’s share passes to the children.
If the couple had instead left everything to each other on the first death, then the risk is that the surviving spouse may choose to not leave an equal share or indeed anything to their step-children in their Will, or they may deplete the estate during their lifetime, not leaving much left.
The trust does not have to be limited to the property, there could instead be a life interest in the whole estate (the residue). The life tenant would be entitled to the income/occupy any property in the same way.
Advantages of including a life interest trust in your Will
• Control over the ultimate destination of the funds.
• Protection should the surviving spouse re-marry/cohabit, or if they get into financial difficulty.
• If this type of trust is used appropriately it can preserve Inheritance Tax allowances, which otherwise may be lost if different types of trust were used instead.
• One other advantage to including a life interest trust in your Will may not be foreseen when the Will is set up. This relates to Care Home Fees. There are limited things that can be done to protect your assets from being taken into account if you need to pay for your care. If you deliberately divest yourself of assets with the intention of not paying for your care, then this can be seen as a deliberate deprivation of assets by the Local Authority.
• If a life interest trust is used in the Will, then this can effectively ‘ring fence’ the capital of the assets within the Trust. If the surviving spouse needs to go into care, then they cannot be assessed as owning the capital of the trust property, as this does not belong to them, it belongs to the trust. It is important to bear in mind however, that this arrangement would not work if both spouses needed to go into care. Also, the law is always changing. There is no guarantee that local authorities will not take issue with this in the future.
Disadvantages of including a life interest trust in your Will
• The spouse is not entitled to the capital of the trust fund. For some, this may be too restrictive and there may be a concern about the freedom of the surviving spouse to do as they please.
• This type of trust can sometimes be less flexible than other types of trust, such as a discretionary trust.
• The inclusion of a life interest trust is likely to cause more administrative work/cost for your trustees when compared to a ‘traditional’ will leaving everything outright to the survivor.
• Often additional work is required when setting up the Wills. For example, if the life interest trust includes a property, then it will be necessary to sever the joint tenancy of the property so that the property is owned as tenants in common. If this is not done, then the life interest trust will not work.