What is a life interest trust, and do I need one?

A life interest trust gives a surviving partner or spouse the right to benefit from their deceased partner’s or spouse’s estate for the remainder of their lifetime or until they remarry. The key aspect is that the surviving partner does not own the other’s estate and, although they have the use of it, they cannot give it away during their lifetime or gift it in their will; it also cannot be used to pay their care fees.

When the second partner then dies or remarries, the life interest trust will end, and the first partner’s estate will then pass to the children. A life interest trust therefore aims to find a balance between ensuring that, when one partner dies, the other will be adequately provided for, whilst simultaneously protecting the estate for the ultimate benefit of the beneficiaries who are usually the children. This is usually an important consideration where there are second marriages and children from previous relationships.

What assets form the trust?

A life interest trust may include any, or all, of the following:

Property

If there is a property in a life interest will trust, the life tenant will almost always be entitled to live in the property or to receive the rental income from it for the rest of their lives. In most instances, the trust will allow the property to be sold and a new one bought for the life tenant to live in during their lifetime.

Cash assets

Where assets such as cash and investments are involved, the surviving partner will be entitled to the net income from those assets. If, however, the net income is insufficient to enable that partner to maintain their standard of living, there will usually also be power to advance capital to them if needs be.

Why are life interest trusts recommended?

There are many reasons why such life interest trusts are recommended:

Ultimate destination of the funds

You are ensuring that whilst your surviving spouse is looked after for the rest of their life, the capital value of the fund is ultimately preserved for your beneficiaries, such as your children. This would therefore protect your estate from the influences of another spouse if they were to remarry.

Bankruptcy of the surviving spouse

As your spouse has no right to the capital of the fund, then the capital value of the fund could not be taken into account by a trustee in bankruptcy if such an event were to occur.

Care home fees

This arrangement would effectively protect the assets within the trust and would prevent them from being taken into account if your surviving partner were to require either residential or nursing care in the future. The income from the fund which is payable to your partner would assist them in paying their own fees.

What are the disadvantages of a life interest trust?

On the death of the first spouse, the survivor doesn’t inherit the deceased’s share of the house outright; they only have the right to live in it. While this may not be a problem in later life it might be if one of the joint owners dies at a young age. For many couples the house is their main asset. Only having access to half its capital value may cause some issues.

A life interest gives a right of occupation and a right to any income, if for example the property was rented out. The surviving spouse can normally move home and use the deceased spouse’s share to buy another property provided there isn’t a loss in value. What the survivor can’t do is spend the deceased spouse’s share of capital.

While many people would prefer not to pay nursing home fees, the fact you don’t have access to all of your capital may affect the kind of care home you can afford to live.

Who should be my trustee?

Care should always be given when deciding who to appoint as your trustee. It is often the surviving spouse and the children. However, appointing an independent trustee is sometimes advised to limit the potential for family conflict. It is also recommended you appoint a maximum of four and a minimum of two trustees.

life interest trust, discretionary will trust