HCR Law Events

13 October 2020

What is a life interest trust and should I include one in my will?

Couples, whether they are married, in a civil partnership or cohabiting, will typically make wills leaving all of their assets to each other when the first of them dies and subsequently to their children when the second of them passes away. If there are no children, they will usually choose to benefit other relatives, friends or charity.

Whilst there is nothing wrong with this structure, it can sometimes cause problems and lead to unintended consequences in the future.

Consider, for example, a couple with children where one partner dies and the remaining person who inherits everything goes on to remarry or start a new relationship. That person may then leave their estate (or a significant portion of it) to their new spouse or partner so that the children are left with very little or potentially even nothing at all.

Similarly, if one partner dies and the other person who inherits everything goes on to need care, strictly speaking, the whole estate could be used up to pay for that care. Again the children would be left with nothing or significantly less than might otherwise have been the case.

To avoid these possible scenarios, couples might be minded to consider including a life interest trust in their wills, to take effect when the first of them dies.

In simple terms, a life interest trust gives to the surviving partner the right to benefit from their deceased partner’s estate for the remainder of their lifetime or until they remarry. The key aspect is that the surviving partner does not own the other’s estate and, although they have the use of it, they cannot give it away during their lifetime nor gift it in their will; it also cannot be used to pay their care fees.

When the second partner then dies or remarries, the life interest trust will end and the first partner’s estate will pass to the children. The life interest trust therefore seeks to strike a balance between ensuring that, when one partner dies, the other will be adequately provided for ,whilst simultaneously ring-fencing the estate for the ultimate benefit of the children. This is usually an important consideration where there are second marriages and children from previous relationships.

Couples will generally consider including a life interest trust in their wills to take effect in respect of the family home only, with the balance of the estate (e.g. bank accounts, investments and personal possessions) passing to the surviving partner free from any trust. Where that is the case, the surviving partner will have the right to continue to live at the property for the rest of their lifetime or until a remarriage, with the property eventually passing to the children.

That said, it is possible for other assets besides the family home to be made subject to a life interest trust. Where assets such as cash and investments are held upon a life interest trust, the surviving partner will be entitled to the net income from those assets. If, however, the net income is insufficient to enable that partner to maintain their standard of living, there will usually also be power to advance capital to them if needs be.

For many couples, the ability to ensure each other’s financial security whilst controlling the ultimate destination of their assets upon death, is one of the main reasons for including a life interest trust in their wills. Despite this key advantage, this structure does not suit everyone as there are some perceived disadvantages associated with it.

For instance, as with any trust, the wills must appoint trustees to administer the life interest trust. The surviving partner can be a trustee, but they cannot be the only trustee and it is common to appoint one or two other relatives or friends to act as trustees alongside them. This can sometimes be regarded as being too restrictive on the part of the surviving partner, as they cannot make decisions independently in relation to the life interest trust as all the trustees must agree together. There are often instances therefore where the surviving partner might feel some resentment that they do not have the freedom to deal with their deceased’s partner’s assets without the involvement of the other trustees.

Another potential issue is in relation to care fees. Although most of us would prefer not to use our assets towards paying for care, the fact that we own assets in the first place means that we generally have greater choice and control over the type and standard of care that we receive. Where there is a life interest trust, the fact that the deceased partner’s capital cannot be accessed by the surviving partner may affect the kind of care that they can afford.

Whether or not to include a life interest trust in their wills is something which couples should think about carefully. There is no right or wrong approach and it will usually depend upon the couple’s priorities, their assets and their family circumstances. Including a life interest trust in wills should not be done simply for the sake of it, nor should it be something which is dismissed out of hand – a conversation with a solicitor is advisable to discuss the pros and cons in detail so that the couple can make an informed decision as to what will work best for them.

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About the Author
Nerys Thomas, Associate (TEP)

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