Protecting your assets on death: Life Interest Trusts

What is a Life Interest Trust?

It is a type of trust that is becoming increasingly popular, where a person has a right to occupy a property but has no right to capital. This form of trust often arises when partners in a relationship, who may or may not be married, jointly own a property. In their wills, they leave their half interest in the jointly owned property on trust, with a right for the surviving partner to continue to live in the property for the rest of their life. This is why it is called a Life Interest Trust.

What are the benefits of a Life Interest Trust?

Usually, the motive for creating a Life Interest Trust in a will is to protect your children’s inheritance. It is particularly common when a couple are making plans for the future and envisage that at some time they could end up potentially in a care home. If on the death of the first partner, with the second partner subsequently going into a care home, a Life Interest Trust could cause a considerable saving in respect of care home fees. This is because the half interest of the person who died would be ring-fenced for the benefit of their children.

Another reason for creating a Life Interest Trust is where parents wish to protect the inheritance of their children in the event that their partner re-marries or cohabits. This is particularly common with couples who have already entered into a second marriage and they have different children. However, it can even occur where the children are of both partners, but one partner believes there is a real possibility that the other may re-marry or cohabit on their death, leaving their assets to the new spouse or children.

Are there any essential requirements in relation to making a Life Interest Trust?

It is vital that the property concerned is held as Tenants in Common rather than Joint Tenants. If the property is held as Joint Tenants, this means that it passes automatically on the death of the first of them to the survivor, irrespective of what is stated in the will. It is crucial, therefore, that if the property is held as Joint Tenants, the Joint Tenancy should be severed to create a Tenancy in Common, thereby enabling each party to leave their interest in the property in their wills. Without splitting the Joint Tenancy, the Life Interest Trust does not work.

Are there any other considerations which ought to be taken into account when making a Life Interest Trust?

It is important to ensure that in creating a Life Interest Trust, it not only applies to the property you are living in at the time the will is made, but it includes substitute properties. We have seen wills which fail to make this provision and the result is that the children miss out on their inheritance. It is also important to consider making a downsizing provision in your will. With an appropriate downsizing clause, the surviving partner will be able to downsize if necessary, following the death of the first party.

There are other careful considerations which need to be given when making a Life Interest Trust. Therefore, if you are looking for a Life Interest Trust in your will, please consult a member of our Team to discuss the best options available to you.