Life interest trust in a will

A life interest trust in a will is a trust created by the will under which one person, known as the life tenant, has the right to benefit from trust property during their lifetime, but does not own the property outright. When the life tenant dies, the property passes to one or more other people, known as the remaindermen or ultimate beneficiaries.

How it works in practice:

The most common example is where a person leaves their home or a share of their home, or a pot of money, in trust. The life tenant has the right to live in the property or to receive the income generated by the trust assets for the rest of their life. When the life tenant dies, the trust ends and the assets pass to whoever the will names as the final beneficiaries, typically children or other family members.

Why people use them:

1. To provide for a surviving spouse or partner while ensuring that the assets ultimately pass to children, particularly where there are children from a previous relationship.
2. To protect assets from being spent, given away, or lost to a new partner's claims after the testator's death.
3. To help with inheritance tax planning in some situations, though the tax treatment needs careful consideration.

Key features:

The life tenant does not own the capital. They cannot sell or dispose of the underlying assets unless the trust terms specifically allow it. The trustees manage the trust and have duties to balance the interests of the life tenant against those of the remaindermen.

The life tenant typically has the right to occupy trust property or receive income from it, but the precise rights depend on the wording of the trust in the will. Some trusts give trustees a discretion to advance capital to the life tenant in certain circumstances, while others are more restrictive.

Tax considerations:

For inheritance tax purposes, the trust property is generally treated as part of the life tenant's estate when they die, under the rules for interests in possession that were in place before 22 March 2006. Trusts created on death still benefit from this treatment, meaning the property is taxed as part of the life tenant's estate rather than under the more punitive relevant property regime that applies to most lifetime discretionary trusts.

There are also income tax and capital gains tax implications for the trustees and the life tenant during the lifetime of the trust.

Practical points to be aware of:

The wording of the trust is critical. A poorly drafted life interest trust can create ambiguity about the life tenant's rights, cause disputes between the life tenant and the remaindermen, or produce unintended tax consequences. The choice of trustees is also important because they will need to manage the trust potentially for many years and navigate any tensions between the competing interests of the beneficiaries.

If the trust includes a property, practical questions arise about who pays for maintenance, insurance, and repairs, and what happens if the life tenant needs to move into care. These matters should ideally be addressed in the will itself or in a letter of wishes.

If you have a specific situation in mind, whether you are thinking of creating one, are a beneficiary of one, or are a trustee dealing with one, I am happy to go into more detail on the particular issues that apply.