Life interest trusts can be used for a number of reasons, not least to ensure that financial provision is made for your spouse or civil partner during their lifetime, whilst preserving any assets for the benefit of your children at a later date.

But what is a life interest trust and exactly how it can it help you and your family in preserving and protecting your personal assets for your surviving spouse or partner, as well as any future generations?

Below we explain the basics of the life interest trust, to what extent they can assist you, considering both their benefits and drawbacks, as well as to whom they are best suited.

What is a life interest trust?

Life interest trusts are also commonly referred to as ‘interest in possession’ or ‘lifetime’ trusts.

With a life interest trust the beneficiaries are split into two groups: the person, usually just one, who has the life interest, and the eventual beneficiary, or beneficiaries, who will receive the property at the end of trust.

The person with the life interest is called the ‘life tenant’, whilst the eventual beneficiary or beneficiaries are called the ‘remaindermen’, whereby the latter will receive the trust property after the life tenant passes away.

The life interest trust will enable you to allocate a beneficiary, typically a spouse or civil partner, who then has the legal right to receive income from or use of a property contained within the trust after you die for the remainder of their life.

When your spouse or civil partner subsequently passes away, the trust is then transferred to different beneficiaries, for example, your children, for their use entirely.

A life interest trust is a type of trust that will typically be included in your will, ie; a testamentary trust, taking effect upon your death, as opposed to a living trust which takes effect during the course of your own lifetime.

Why set up a life interest trust?

The life interest trust is ideal for settlor’s looking to protect and preserve their share in the family home for their children in the event of their spouse remarrying or deciding, at a later stage, to benefit someone who is not the settlor’s child upon their own death.

These types of trusts have become especially popular within the modern family comprising of children from a previous marriage or relationship. The life interest trust is also a good way of protecting personal assets, including one’s share in the family home, against third parties in general, for example, should your surviving spouse or civil partner be made bankrupt or become a victim of fraud.

Can a life interest trust be used to avoid care home fees?

The life interest trust can also be used to shield your share of the family home, or other personal assets, from local authority assessment in the event that your surviving spouse or civil partner requires residential or nursing care.

In the UK care costs are means-tested by local authorities, whereby anyone with income or capital exceeding a relatively low threshold will be required to pay for some or all of their care.

By placing your personal assets into a life interest trust, after your death these assets will not belong to your surviving spouse or civil partner, legally speaking, even though they will be able to derive a benefit from those assets during the course of their own lifetime.

What are the benefits of a life interest trust?

The life interest trust allows you to make provision for your spouse or civil partner, ensuring they have a home and/or income for the rest of their lives after you die, whilst preserving any capital for your children’s future.

Life interest trusts are also flexible compared with alternative options. In a situation where a couple is married or in a civil partnership, other similar trusts specify that all assets will pass to the survivor automatically.

The life interest trust will not only allow for personal assets to be passed to other family members, you can be completely sure who will receive the benefit of those assets upon your death.

In addition, any assets passing in trust between spouses or civil partners are exempt from inheritance tax under what’s known as the spousal exemption.

What are the drawbacks of a life interest trust?

There are, however, drawbacks to using the life interest trust. In particular, because the assets held in the trust are treated as if they belong to the life tenant for the purposes of inheritance tax, in the case of unmarried couples they will be taxed at 40% on the death of the surviving partner for anything over and above the nil-rate band.

To whom is a life interest trust best suited?

Life interest trusts are best suited to couples, either married or in civil partnership, who are looking to preserve their personal assets as much as possible for their children, and any other family members.

In this way, the couple can protect themselves, and their loved ones, against various risks, including the impact of inheritance tax and care home fees.

What are the alternatives to a life interest trust?

There are various other types of trust that can be considered, most commonly these include the following two types of trust: the bare trust and the discretionary trust.

The bare trust

The most basic type of trust is the bare or absolute trust where assets are held for the beneficiary absolutely until they attain the age of 18. Having turned 18 the beneficiaries acquire the automatic and absolute right to the trust fund.

As the name suggests, the bare trust creates a fixed and absolute interest in the trust fund to benefit a named beneficiary once they reach the age of majority.

Bare trusts are often used to transfer assets to minors, such as the settlor’s children or grandchildren, with the trustees looking after the assets until a beneficiary comes of age.

Discretionary trust

Under the discretionary trust no beneficiary has a fixed or absolute entitlement to any share in it, typically leaving the trustees with a wide discretion as to the extent to which any benefits are received and by whom.

Although the settlor can provide the trustees with specific guidance on how to manage and administer the trust fund within a ‘Letter of Wishes’, ultimately how the trust fund is managed and administered is left to the trustees.

Discretionary trusts are often chosen where the settlor wants the flexibility to make financial provision for various different individuals at different times.

How to set up a life interest trust?

Setting up a life interest trust can be complicated, whereby much will depend upon your specific set of circumstances, as well as your wishes.

It is, therefore, important to enlist professional help from an expert in wills and trusts when considering the question of “What is a life interest trust?”. You may also want to consult family members in making any decision about setting up this type of trust.

By seeking expert legal advice you can feel confident that you are not only taking legitimate steps to make financial provision for the future of your spouse or partner, as well as your children, but that the trust you choose is the right one for you and your family.

Your legal adviser can help you to explore every available options. They can also draft any trust deed or will on your behalf.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal advice should be sought.


What is a Life Interest Trust? 1

Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.

Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.

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