Living Will Or Trusts
What is a Trust?
A trust is a legal vehicle whereby certain persons-the ‘Trustees’ hold property, assets or money for the benefit of another person.
What is a Life Interest Trust?
It is the right to receive income or have the use of property for the life of the surviving spouse or partner, who is called the ‘Life Tenant’. For tax purposes, the Life Tenant is treated as if they own the property.
While they are totally entitled to the income from any assets, the Life Tenant is not allowed to access the capital.
When would I need a Life Interest Trust?
If you are in a second relationship and both you and your spouse or partner have children from a previous marriage or relationship, then it is common practise to put a Life Interest Trust into your Will.
This means that on your death, your share of the property-whether that is just the family home or the rest of your assets too, instead of going straight to the surviving spouse, goes into the Trust.
The Trust holds the property and allows the surviving spouse to live in it (or if it is money, to draw the income from it), for the rest of their life. Once they pass on, the Trust ends and the assets go to your children, or whoever you have named as the ultimate beneficiaries.
The Trust could also finish if your surviving spouse should remarry, so that at that point the beneficiaries would become entitled to their inheritance from your estate.
Will it save tax?
Unfortunately, this type of trust has never been able to save tax. The main purpose of this type of Trust is to preserve assets for the people you want to have them, even if they finally receive those assets long after your death.
What is a Flexible Life Interest Trust?
This is the same as above, but the Life Tenant is allowed to access the capital-but only with the agreement of the other Trustee or Trustees.
Imagine, for example that a spouse has died and left £50,000 in a Life Interest Trust for their children, but the surviving spouse as already explained, is entitled to the income.
Assume that some household disaster happens, for example the boiler needs replacing. If the surviving spouse has limited means then if the Trustees agree, the money to buy a new boiler can be taken from the £50,000. It would be unfortunate if the surviving spouse could not access the money and would have to go without a boiler in their later years. They would be extremely unhappy to know that there was a large amount of money in the Trust that they could not touch, even though they might desperately need it.
If the power is built in to the Trust to allow them to use some of that money then the ultimate beneficiaries know that their money is, for the most part, safe, and the surviving spouse knows that in a desperate situation they will be looked after.
As can therefore be seen, this type of Trust is very common as a tool to preserve assets, and is often recommended for those in a second relationship. It is very useful as it protects all those concerned with the estate; the spouse will be looked after and the children are guaranteed to benefit at the death of the surviving spouse.
What are the other benefits of this type of Trust?
The Trust can also be used to protect assets from creditors, or, for example, if the surviving spouse goes into Long Term Care, then the Local Authorities cannot force the Trustees to sell the home or asset to pay for that person’s care.
In conclusion, Life Interest Trusts are very common in Wills these days, mainly because they can give assurance to everyone, and such a Trust is easily administered. If you are in a second or subsequent relationship then this type of Trust may be precisely what you need to protect your family, knowing that with a correctly drafted Will there will be no arguments because everyone you care for has been looked after.
This is a brief summary of the uses of a Life Interest Trust, and does not cover all aspects of this subject. The above information only applies to England and Wales.
Brian Meehan is a professional Will Writer, and proprietor of The Hertfordshire Will Company, which has been trading since 2001. The company specialises in Wills for clients in second relationships. If this is you and you are concerned about what might happen after your death, then please visit http://www.hertswill.co.uk/wills_second_relationships.php and see how we can help you.
What The Heck Is A ‘TRUST’ (Part 1)
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