The terms life interest and right of occupation are sometimes used interchangeably, however there is an important distinction between these two types of trusts.

For both, if established under a Will, they are immediate post death interests. This means that, for inheritance tax purposes, the immediate beneficiary (life tenant or occupier) is treated as though they had inherited the assets in the trust absolutely. The trust fund will also form part of that beneficiary’s estate if they continue to have an interest in the trust at the date of their death. This can have significant inheritance tax consequences. If their interest is brought to an end during their lifetime then this will be treated as a gift by them and the seven year survivorship requirement for potentially exempt transfers will apply.  Due to the inheritance tax consequences, careful planning is required where the intended beneficiary is not a legal spouse, as the intended trust could fail to take effect as intended due to the need to pay inheritance tax on the first death.

A right of occupation is however generally limited to giving the occupier a right to live in a property, which had either belonged to the deceased or which they owned as tenants in common with the deceased. This right of occupation is usually stated to be for the occupier’s lifetime, but this is not necessarily the case and it is common to include provisions which would bring the occupation to an end during the occupier’s lifetime such as remarriage, if they move into care or on the sale of the property. This type of trust is therefore narrowly constructed and with the sole aim of providing a home for the beneficiary.

It is possible for rights of occupation to include the authority to sell the property and reinvest the proceeds, but it should not be taken for granted that this is the case. Careful consideration also needs to be given as to what should happen to any surplus cash available if the occupier has downsized; should this immediately pass to the ultimate beneficiaries, and therefore leave the trust, or should it be used to provide for the occupier until the trust is brought to an end?

In contrast, a life interest tends to give the life tenant a right to enjoy all trust assets for their lifetime. This includes a right to live in trust property and/or to receive an income from any other assets held in the trust. It would also extend to providing the life tenant with an income from the proceeds of sale, if the trust property were ever sold and no replacement property was purchased, for example.

Much like the right of occupation, the trust can be brought to an end during the life tenant’s lifetime if there are any triggering events, such as remarriage, but it would be uncommon for a life interest trust to end because the beneficiary has moved into care or due to the sale of a trust property.

It is important to note that a life tenant under a life interest does not have right to the underlying trust capital. This means that they cannot take it for themselves, nor can they gift it away by Will or during their lifetime, unless they want to advance a share to the remaindermen set out in the Will. For this reason, this type of trust is particularly popular in second marriages, as it ensures that the spouse is provided for, but ensures that assets pass to the children of the first to die.

In both life interests and rights of occupation, the trustees are responsible for ensuring  that the terms of the trust are adhered to. The trustees also have a duty to ensure that trust property is protected, properly insured and maintained by the life tenant or occupier, to secure the underlying value for the remaindermen who will receive the trust capital once the trust comes to an end. Most rights of occupation and life interest trusts are worded to require the beneficiary to undertake these tasks, but it is important to note that, if they do not, it is the trustees who must do so. In rights of occupation this can be particularly problematic, as the trustees are unlikely to have any cash in the trust with which to pay these expenses. As the duty is a personal one, the trustees would therefore be required to pay these costs from their own funds. The trust can of course be brought to an end, if the beneficiary is not complying with their requirements, but the trustees may also need to take legal action to remove them from the property. Once again, they may not have any cash available within the trust to do this.

For this reason, a life interest is generally more favourable, as it provides greater flexibility and usually also gives the trustees access to cash with which to maintain the trust and cover any expenses, without finding themselves out of pocket. Life interests are however more complex to draft and should include a letter of wishes, if the testator wishes to include the authority to pay capital to the life tenant or any of the remaindermen during the life tenant’s tenure.

If you would like to consider including a trust in your Wills, or you are the trustee of a Will Trust who requires advice then please contact Ashley Minott by email or on 01494 893518.