Right Trust for the Job – Life Interest Trusts

There are some that think that Trusts are “only for the rich and the wealthy”.

There are others that believe that the answer to any kind of estate planning problem is to “just put [it] into a Trust”.

A Trust is simply an estate planning “tool” and, like with all “tools” it is vital to ensure that the adviser is using “the right tool for the job”. This is true whether a person is considered financial wealthy or not.

In this article, the writer will consider Life Interest Trusts, what they are and how they can be used.

A Life Interest Trust, in its simplest form, is where the person creating the Trust (“the Settlor”) transfers Assets (“the Trust Fund”) into the hands of trusted individuals (“the Trustees”). The Trustees then use the Trust Fund for the benefit of (usually) one person (“The Life Tenant”) for a period of time (“the Trust Period”) that comes to an end (usually but not always) on the death of the Life Tenant. When the Trust Period comes to an end, the Trustees then distribute the fund amongst the ultimate intended beneficiaries (“the Remaindermen”).

Whilst the Life Tenant is entitled to benefit from the Trust Fund, it means that all of the income generated by the Trust is payable to the Life Tenant. The Life Tenant also has the right to live in any property the Trust Fund has, rent free. (They are normally obligations imposed on the Life Tenant to live in such a property such as making sure that buildings insurance is always in place and that the property is maintained).

However, the control of the Trust Fund belongs to the Trustees. The Life Tenant cannot deplete the Trust Fund, cannot demand that funds are paid to anyone else and the Trust Fund is protected from claims that may be made against the Life Tenant because the Trust Fund does not belong to the Life Tenant.

Situations Where a Life Interest Trust is Useful

A Life Interest Trust is particularly useful in variety of situations such as (but this list is not exhaustive):

• If the Life Tenant needs to go into residential care then the value of the Trust Fund is protected from the Life Tenant’s care fees. The income the Life Tenant is entitled to receive would be used for the care fees but the actual capital value of the Trust Fund would be protected.
• Modern society means that there are many “blended families”. The common standard Will for many couples is to leave everything to each other in the first instance and then on to children on second death. However, if the survivor then remarries then the survivor could make a new Will leaving the estate to a new spouse. The risk being that the children of the first marriage receive nothing. A Life Interest Trust would ringfence the estate of the first to die so that the survivor benefits from the Trust fund however on the death of the survivor the Trust Fund does not pass with their Will but instead passes to the original chosen beneficiaries of the person who died first.
• Many couples may split various roles between them. However, this can mean that one of them may not have the expertise or experience to deal with financial matters. Alternatively, it may not be appropriate for one them to manage such money because they have never managed such money before and they could be easily taken advantage of. In which case, the person creating the Trust can transfer the funds to their chosen Trustees knowing that the Trustees would look after the Life Tenant and ensure the funds were used appropriately.

However, before creating any type of Trust, it is vital to take legal and tax advice from appropriately qualified professionals. Trusts have various reporting obligations to comply with such as registering the Trust with H M Revenue & Customs Trust Registration Service, tax returns and event forms.

When the Trust is created will dictate what type of tax system will apply. If the Trust is created during the lifetime of the Settlor, it means that the Trust will enter the “Relevant Property Regime”. This means that there can be reporting requirements, entry charges, exit charges and ten-year anniversary charges all depending on the value of the Trust Fund and the type of asset being transferred in to the Trust.

However, if the Trust is created on the death of the Settlor, it means that the Trust will be treated as an “immediate post death interest”. The tax treatment on death would be the same as if the Settlor had left the funds to the Life Tenant outright which can be useful for married couples as anything that passes between spouses passes free of inheritance tax. It also means that any unused inheritance tax allowance (known as the Nil Rate Band) can be potentially transferred to the surviving spouse. The value of the Trust Fund is then added to the estate of the Life Tenant for inheritance tax purposes and any inheritance tax due is split pro rata between the Trust and the Estate of the Life Tenant.

How Pinney Talfourd Can Help

If any of the above relates to you then you can speak with an adviser at Pinney Talfourd. Our specialists are experienced in the creation of Trusts either during a person’s lifetime or in their Will. We can assist with the registration of the Trust, Trust administration and the winding up of the Trust and assisting with the related reporting requirements.