What is a Life Interest Trust and how can it help you?

09 June 2016

What is a Life Interest Trust and how can it help you?

If you’ve considered who obtains and protects your family home and property when you are gone, a Life Interest Trust is an excellent way to ensure that your property is left in the right hands. Using this trust allows you to specify who owns the rights your property in order to protect your family home and property.

What is a Life Interest Trust?

When considering who owns the property in a Life Interest Trust, it is important to understand that your chosen individual (the “life tenant”) will have the right to occupy your property and potentially receive income without having the right to the capital. This means that you can allow someone to remain living in your property after your death until they die, remarry, cohabit or until the end of a designated time period chosen by yourself. At the end of the Life Interest Trust, the legal ownership of your share of the property can then be transferred to your chosen beneficiaries.

Joint Ownership & Tenants in Common

If you own your house jointly with another individual, your share of the property will automatically pass to the surviving co-owner irrespective of the terms of your Will. It is therefore vital when considering a Life Interest Trust to ensure that you own your property as tenants in common - you may also need to check your Title Deeds if the property is unregistered or the Land Registry if it is registered. If your property is owned jointly you will then need to sever your joint tenancy in order to appropriately set up a Life Interest Trust. When you own your home as tenants in common, you are able to gift your share in the property in your Will and can put this into a Life Interest Trust.

Substitute Properties

It is possible during the trust period for the life tenant to request that a substitute property is purchased, in the event that they wish to downsize. Any surplus funds from this sale would be held by your trustees and protected for your beneficiaries. If you choose however to give the life tenant the right to income as well as the right to occupy your property, then the life tenant will be entitled to any income generated by the capital. Appointing Trustees You will need to appoint between two to four Trustees to manage this trust on your behalf; if you appoint a professional trustee, however, they are able to act alone. Serious consideration should be given to the appointment, as they will have full control over your asset until they passes to your beneficiaries. The trustees will have a duty to act in the best interest of the life tenant, and will be unable to sell the property without their consent.

Who would benefit most from a Life Interest Trust?

This route is beneficial for those wishing to protect their share of family home for their children in the event of your spouse remarrying after your death or if you have married your partner and have children from previous relationships. The trust will allow your spouse to remain in the property for the remainder of their life, and they will also be responsible for keeping it insured and in good repair, but the capital will ultimately go to your children on the death of the surviving spouse. It is worth noting the potential for tax implications when granting a life interest to an individual who is not your spouse. If the life interest is granted to a spouse, the initial gift will not be subject to inheritance tax due to spousal exemption; on the death of the surviving spouse, the Transferable Nil Rate Band allowance can be used up to the current inheritance tax allowance at that particular time and therefore may not be liable for inheritance tax depending on the value of the estate. However, for an unmarried partner or other individual, there will be no entitlement to any spousal exemption advantages and the value of the asset will form part of their estate for inheritance tax purposes, despite the fact that they did not own it themselves.

How to set up a Life Interest Trust

When looking at how to set up a Life Interest Trust, it must be drafted into your Will and needs to be set up on your death. It is worth carefully considering what you are looking to do when drafting a Will, as the Life Interest Trust may or not be the ideal solution for you. It can certainly be used to effectively control the final destination of your property and ensure that your beneficiaries are provided for after your death, giving you peace of mind that their inheritance is safe from interference from any future hostile creditors such as bankruptcy, divorce or long term care costs.

If you are looking to set up a Life Interest Trust in your Will, get in touch with a member of our team to discuss the best option for you.

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