There are a few different types of trust, most of which have existed for at least a century with minor tweaks to reflect changing tax treatments or legislation. However, some trusts are being paraded around as new miracle ways to avoid care fees or inheritance tax. In most cases this is simply practitioners trying to put a new spin on old practices to market them as something new and innovative.

Life interest trusts are often paraded around in this way and I will admit that it does annoy me when people rename them as something new to make them harder to research. A professional contact recently sent me an article about April Wills, which were being sold by a company as a magic form of trust to protect assets from care fees. These underneath it all were either Life interest trust wills or discretionary trusts however their terminology made it almost impossible for their clients to do their own research.

In effect, a life interest trust is a form of trust (usually established under a Will) whereby the settlor names a beneficiary who will receive a benefit from the trust for their lifetime. This person is known as the life tenant. The life tenant can enjoy the use of trust property or receive an income from the trust, but does not have a right to the underlying capital. Following the life tenant's death, or earlier if they give up their rights to the trust during their lifetime, the underlying capital of the trust passes to the remainder men as set out in the original trust deed.

This type of planning is often used to allow spouses to provide for each other following the first death, but with a guarantee that the share of the estate belonging to the first to die will pass to their children. The survivor would not have the ability to gift this away or give it to anyone else as they will not own the capital. It is particularly useful on second marriages, where there are children from a first relationship. It is also useful if either party is worried about the survivor remarrying and their assets passing to a new spouse.

Life interest trusts can also be useful in terms of inheritance tax planning where spouses are involved, as the assets are still treated as passing to the spouse and so benefit from the spouse exemption. This exemption does not apply for any other class of beneficiaries and so care is sometimes needed to avoid unforeseen inheritance tax consequences.

It also needs to be noted that the trust assets aggregate in the survivor's estate for inheritance tax purposes and so careful thought needs to be given  to this type of planning when individuals have significant wealth in their own right or if each party is leaving their estates to different people as the survivor’s beneficiaries could suffer additional inheritance tax as a result of the trust.

These trusts can also offer some protection if the survivor is ever assessed on their ability to pay for the costs of their care. This is again because the survivor does not own the underlying capital and only has a right to income from the trust.

When considering life interest trusts it is important to weigh up the added complications that this structure will create for the survivor and the additional administration it will create, as it is now necessary to register all expressly created trusts and to keep the trust register up to date. You also need consider the relationship between the life tenant, beneficiaries and trustees as any conflict can make the trust very difficult to administer. The role of trustee carries with it various obligations, such as to protect and insurer trust property and to remain neutral between the beneficiaries. Where the life tenant and the remaindermen do not have a good relationship, or there is no additional cash in the trust to cover trust expenses, then the role of trustee can be particularly stressful.

Life interest trusts can however be a useful tool and do offer solutions when a testator wants certainty that their ultimate beneficiaries will inherit from their estate.

If you are considering putting in place life interest trusts and want to discuss whether they are appropriate for your estates then please contact Ashley Minott by email or on 01494 893518.