A Life Interest Trust is a trust that you can include in your Will designed to protect your share of the family home (or other assets) against re-marriage by your surviving spouse or partner, and/or the long-term effects of their care fees.
Life interest trusts are commonly used to protect a person's share of the family home (or other assets) for their children, whilst still providing their surviving spouse or partner with the security and the right to live in the property for life.
This protection is afforded because the first to die’s share of the asset is not ‘inherited’ by the surviving spouse or partner, but rather they are given a right to enjoy the asset for life i.e. living in the property, and then eventually the asset will be inherited by further beneficiaries i.e. children when the surviving spouse or partner dies.
What Is a Life Interest Trust?
A trust is a legal arrangement in which an individual (the settlor) can entrust others (the trustees) to hold assets for the benefit of further individuals (the beneficiaries).
The term ‘life interest’ simply means that a person has been given the right to use, occupy or receive the income from an asset for the duration of their life without inheriting it outright.
The person who receives the benefit of the life interest, i.e. the person who gets to use the asset, occupy it or receive the income from it is called the ‘life tenant’.
When the life tenant’s interest comes to an end, usually on their death, the asset will pass outright to the ultimate beneficiaries (the remaindermen). Most commonly, this would be the children of the first spouse or partner to die.
These can be particularly useful where there is a second marriage and children from previous relationships.
For example, Mr and Mrs Rex have married later in life, both having been married before and having had two children each from these previous marriages. Mr Rex dies first and leaves a life interest over his share of the property to Mrs Rex so that she can live there for life, and then following her death, Mr Rex’s share will pass to his children.
How Does a Life Interest Trust Work?
1. The trust is included in your Will
A life interest trust can be included in your Will, but it won’t come into effect until your death. A life interest trust is most used to protect a share of the family home, but it can be used to protect cash too.
2. The deceased person's share passes into the trust
For an asset to be ‘caught’ by the life interest trust it is important to make sure that it passes under the terms of your Will. This means that assets must be held jointly as tenants in common, or in an individual’s sole name. It is important to get legal advice as the trust might be ineffective if the assets are not held correctly.
3. The surviving beneficiary receives a life interest
The surviving spouse or partner is known as the ‘life tenant’ and they will have the right to use, occupy or benefit from the income of the asset. They will not inherit the asset outright i.e. it won’t become ‘theirs’.
In the context of the family home, this means that the surviving spouse or partner will be able to live in the property or receive an income from it for life.
4. Trustees administer the trust
The person creating the life interest trust will appoint ‘trustees’ who will hold the asset ‘on trust’ for the benefit of the tenant during their lifetime and then for the ultimate beneficiaries at the end of the trust period (the remaindermen). It will be their responsibility to make sure that the trust terms are being complied with and that the interests of all parties are being safeguarded.
5. The trust eventually comes to an end
Life interest trusts usually come to an end when the life tenant dies, but it is possible for the life tenant to bring the trust to an end sooner, if they wish to. Alternatively, the Will might provide for other trigger events such as a remarriage or cohabitation which would bring the trust to an end sooner.
Why Would You Put a Life Interest Trust in Your Will?
Protecting your children's inheritance
Life interest trusts can be useful in protecting a share of your family home against your surviving spouse or partner’s care home fees, remarriage or change of Will for your chosen beneficiaries i.e. your children.
They can be particularly useful to blended families where parents are keen to provide for their own children from previous relationships whilst also giving their second spouse or partner the comfort of having somewhere to live for life.
Providing security for your surviving spouse or partner
They can be used to give your surviving spouse or partner the security of having somewhere to live but without giving them your share of the property outright.
Planning for remarriage
If your surviving spouse or partner was to inherit your assets outright and then went on to remarry, your assets would form part of their estate passing into that new marriage.
If the surviving spouse or partner does not make a Will, then the assets could pass to their new spouse under the Intestacy Rules. Even if they do make a new Will, there is no guarantee that they will provide for your children.
Having a life interest in your Will means that even if the surviving spouse or partner does remarry, your share of the asset is protected for your chosen beneficiaries and will not be affected by the remarriage.
Protecting family assets
Having a life interest trust in your Will enables you to decide who should ultimately inherit your assets, they can be a good way of ensuring that there are assets to pass on following the second death.
Planning for potential care costs
Life interest trust Wills are not a way of avoiding paying for care completely but they can be useful to stop your surviving spouse or partner from using your share of an asset towards their care and for ensuring that it can pass to your beneficiaries.
Of course, it should be noted that assessments for care costs can be fact and case specific.
Life Interest Trusts and the Family Home
Clients often wish to include a life interest trust over the family home in their Wills as it is a way of protecting their share of the property from the survivor’s care costs, remarriage or change of Will.
When clients prepare life interest trust Wills, it is essential that we check how the property is held to ensure that the shares are capable of being ‘caught’ by the life interest trust in the Will.
Property and land can be owned in sole or joint names.
There are two types of joint ownership; joint tenants and tenants in common.
If property is owned as ‘joint tenants’, then it will automatically pass to the surviving co-owner regardless of any provision in the deceased’s Will.
However, if property is owned as ‘tenants in common’, then the deceased’s share will pass under the terms of their Will.
It is essential that a jointly owned property is held as ‘tenants in common’ if it is to be caught by the life interest trust provisions in a Will.
If the property is not held in this way, then the first to die’s share will automatically pass outright to the surviving co-owner, outside of the scope of the Will, and won’t be protected by the terms of the life interest trust in the Will.
| Joint tenants | Tenants in common |
|---|---|
| Owners generally own the property jointly | Each owner has a distinct share |
| A deceased owner's interest normally passes automatically to the survivor | A person's share can pass under their Will |
| Cannot normally be directed to children through a Will | Can potentially be placed into a Will trust |
| Often unsuitable where the objective is to create a life interest trust over a person's share | Commonly used where a life interest trust is intended |
Legal advice should always be sought before changing the ownership of a property.
Who Can Benefit From a Life Interest Trust?
Most commonly, clients make provision for their surviving spouse or partner to have the enjoyment of the asset for life and then on their death for the asset to pass to their children. However, it really depends on your circumstances and family make up.
Life interest trusts can be drafted to make provision for:
- Spouse
- civil partner
- unmarried partner
- children
- stepchildren
- grandchildren
- step grandchildren
- other family members
Your solicitor will be able to talk through the various options when preparing or reviewing your Will.
What Rights Does the Life Tenant Have?
The Will itself sets out exactly what rights the life tenant has and it is always important to review these carefully to ensure that you are happy with the provision made.
Potential rights can include:
- living in the property;
- receiving income from trust assets;
- requiring the trustees to deal with the property in accordance with the trust terms;
- moving to another property in certain circumstances.
A life tenant does not have a right to spend the capital protected by the life interest trust i.e. your share of the family home, but they will have the right to enjoy it during their lifetime i.e. to live there.
Can the Surviving Spouse Sell the House?
This depends on the terms of the life interest trust, but yes, it is possible to include provision for the life tenant to be able to sell the existing property and purchase another property to be held on the same terms.
Typically, a surviving spouse or partner will want to downsize after the first death.
Where there are surplus funds, for example because the new property was cheaper, then usually these funds will be shared between the survivor and the trust. But again, it depends on the terms of the life interest trust.
Example:
If the family home is sold for £400,000 and the survivor moves to a property costing £300,000 the trust might provide that the survivor takes their £50,000 and that the remaining £50,000 is to be invested to provide an income for the survivor. Eventually, this £50,000 will pass to the ultimate beneficiaries when the trust comes to an end.
These provisions are not automatic, and so careful drafting is required.
What Happens to a Life Interest Trust When the Beneficiary Dies?
Normally, when the life tenant dies this triggers the end of the trust.
At this point, the trustees need to identify who the ultimate beneficiaries are and then arrange for the asset to pass to them as per the terms of the Will.
What Are the Advantages of a Life Interest Trust?
Life interest trusts can be advantageous as they can:
- provide security for a surviving spouse or partner.
- protect the deceased's intended share of the family home for children or other beneficiaries.
- provide greater control over who ultimately inherits.
- be particularly useful for blended families.
- help with longer-term estate planning.
- provide flexibility if the trust is drafted appropriately.
Are There Any Disadvantages to a Life Interest Trust?
Life interest trusts are not for everyone as they can mean that additional administrative steps need to be taken on first death. Further, not everyone wants to ‘tie up’ an asset in such a way which means that their surviving spouse or partner cannot do what they want with it after the first death.
Other common disadvantages include:
- additional complexity;
- trustee responsibilities;
- potential disagreements between the life tenant and trustees;
- restrictions compared with outright ownership;
- potential tax implications;
- possible costs of administering the trust;
- the need to keep the Will and property ownership arrangements under review.
These disadvantages are often outweighed by the advantages of the trust, but it is important to understand all the implications before deciding whether to include a life interest trust so legal advice should always be sought.
Life Interest Trusts and Inheritance Tax
Life interest trusts must still be taken into consideration when ascertaining whether inheritance tax is due on the first to die’s death, and they will also be relevant to the life tenant’s estate for inheritance tax purposes.
Where a life interest has been left in favour of a spouse or civil partner on first death, then the spouse exemption will usually apply meaning that there is no inheritance tax to pay.
However, it is possible to leave a life interest in favour of an unmarried partner or other family member so this would not always be the case so a careful analysis of the inheritance tax position would be needed.
Passing a share of the family home by way of a life interest trust to an unmarried partner can also cause issues with the availability of the Residence Nil Rate Band, as the children of the first to die will not be directly inheriting the property. Again, this could inadvertently cause tax or more tax to be due and so careful consideration is needed.
The value of the assets held in the trust for the surviving spouse or partner will be added to the value of their estate on their death to work out what inheritance tax needs to be paid. It might be that the trust needs to pay an apportioned amount of tax as a result.
Specialist legal advice should be sought at the time as the rules do change. In addition, there can be penalties and interest for incorrect or non-reporting and payment of inheritance tax.
Does a Life Interest Trust Protect Against Care Fees?
Life interest trusts can be used to protect the first to die’s share of an asset against the impact of care fees by the surviving spouse or partner when created by Will.
Whilst it is possible to create a life interest trust during a lifetime, the protection against care home fees depends on the circumstances at the time when the trust was created.
There is a risk that if assets are placed into trust during someone’s lifetime then they will be considered to have ‘deliberately deprived’ themselves of an asset that should have been used to pay for care. If this is the case, then the local authority might treat you as still owning that asset, despite the fact that you no longer do, and charge you for the full cost of your care.
Again, it is essential to take legal advice so that your specific circumstances and reasons for wishing to create a trust can be assessed to avoid problems in the future.
If a couple both prepare life interest trust Wills, but then both go into care whilst they are both still alive, then the trust will not have taken effect (as this only occurs on death) and so there would be no protection for the asset. When one of the couple dies, the trust will take effect, and some protection may then be afforded by the life interest trust.
What Happens If the Surviving Spouse Remarries?
If your surviving spouse or partner inherits outright from you and then remarries, the assets they have inherited will be taken into that new marriage. This can mean that the children from previous relationships receive less, or nothing at all, when the survivor dies.
A life interest trust can instead provide the survivor with rights to use the property for life, whilst preserving the underlying capital for the beneficiaries i.e. the children from a previous relationship.
Again, the terms of the life interest trust will determine the actual rights and protections so legal advice should be sought.
Who Are the Trustees of a Life Interest Trust?
Trustees are the people identified by the person making the life interest trust Will to be responsible for holding the property ‘on trust’ for the benefit of the surviving spouse or partner during their lifetime, and then eventually for the ultimate beneficiaries.
Anyone who is aged over 18 years of age and has mental capacity can be a trustee.
However, careful consideration needs to be given as to whether an individual is suited to the role as they will be holding potentially valuable assets for another person’s benefit.
They therefore need to be responsible, trustworthy and capable of fulfilling the other duties required of a trustee.
Again, a discussion should be had with your solicitor about who suitable trustees might be given the importance of their role.
It is possible for the surviving spouse or partner to be a trustee, along with the children who will ultimately benefit from the trust, but caution must still be exercised particularly where parties don’t get on or where there is the potential for a future dispute.
There will always need to be at least two trustees, but there can be up to four.
If a trustee dies or is no longer able to act, then there are steps that can be taken to remove or replace them.
What Happens If I Sell My House After Making a Life Interest Trust?
It is fine to sell your house after making life interest trust Wills, you will need to be careful to ensure that the new property will be caught by the terms of the life interest trust by holding it jointly as tenants in common.
You should also review the Will to make sure that the description of the assets to be caught by the trust will cover this new property, and that your trustees and beneficiaries are still appropriate.
Provision can be made in the life interest trust to protect the net proceeds of sale, should you not immediately buy another property. This is not automatic so careful drafting is needed.
It is, therefore, important to review your Will after any sale and purchase of property.
Can I Change or Remove a Life Interest Trust?
Until the trust comes into effect on the first death, it is possible to change or remove the life interest trust provided that you have the required capacity to review and remake your Will.
Once the first to die dies, the trust will be created and it is more complicated to try and undo the effect of a life interest trust. There are also tax consequences to consider so legal advice should always be taken.
Life Interest Trust vs Discretionary Trust
Life interest trusts are not the only trusts that are capable of being created by Will.
Discretionary Trusts might be considered as an alternative, but they are not suitable for everyone, and don’t offer the same protections as the life interest trust.
There is a brief summary below which sets out some to the key differences between the two:
| Life Interest Trust | Discretionary Trust | |
|---|---|---|
| Who benefits? | Usually a specified beneficiary | Trustees have discretion over beneficiaries |
| Main benefit | Gives a defined right to use/income from assets | Greater flexibility over who benefits |
| Common family use | Protecting a spouse's rights to occupy the home | Flexible family/inheritance planning |
| Control | Beneficiary has defined rights | Trustees generally have greater discretion |
You should always take legal advice when considering a Will trust to make sure that the correct trust is identified for your circumstances.
How Can Timms Solicitors Help with Life Interest Trusts?
A life interest trust can be a useful way of providing security for a spouse or civil partner while protecting your share of the family home or other assets for your chosen beneficiaries. However, the right arrangement will depend on your individual circumstances and the terms of your Will.
At Timms Solicitors, our experienced Wills and Probate solicitors can help you:
- understand whether a life interest trust is right for you;
- review how your family home is owned and whether any changes may be appropriate;
- draft or update your Will to include suitable life interest trust provisions;
- advise on the appointment and responsibilities of trustees; and
- explain the potential legal and tax implications of your arrangements.
We can also review an existing Will or trust if your circumstances have changed, such as moving home, changes to your family or financial circumstances, or the death of a beneficiary.
If you are considering a life interest trust in your Will, our Wills and Probate team can provide clear, practical advice to help you protect your wishes and plan for your family's future. Please contact us on freephone 0800 011 6666 or at legal@timms-law.com.
Frequently Asked Questions
What is a life interest trust?
A life interest trust is a type of trust that allows a person, known as the life tenant, to benefit from an asset during their lifetime without necessarily owning the underlying capital outright. A common example is leaving a share of the family home in trust for a surviving spouse or civil partner, with the capital ultimately passing to children or other beneficiaries when the life tenant’s interest ends.
Is a life interest trust a good idea?
A life interest trust can be useful where you want to provide for a spouse or civil partner while also protecting assets for your children or other beneficiaries. It can be particularly relevant for couples with children from previous relationships or where there are concerns about what may happen to assets in the future. However, a life interest trust is not suitable for everyone, so it is important to take professional advice based on your individual circumstances.
Can a life interest trust protect my house from care fees?
A life interest trust may form part of wider estate planning, but it should not be viewed as a guaranteed way of protecting your home from care fees. Whether an asset is taken into account when assessing someone’s ability to pay for care depends on the circumstances and the applicable rules. Deliberately arranging your finances to avoid care costs can also have consequences. You should therefore seek specific legal advice before relying on a trust for this purpose.
Can I put my house into a life interest trust?
It may be possible to protect a share of your home through a life interest trust in your Will. The way the property is owned is important. Where a couple own a property as tenants in common, each person has a distinct share which can generally be dealt with under their Will. If the property is owned as joint tenants, the position is different because the deceased’s interest will normally pass automatically to the surviving owner.
Can my spouse sell a house held in a life interest trust?
Potentially, yes. The terms of the life interest trust should explain what happens if the property needs to be sold. For example, the trust may allow the surviving spouse to sell the family home and use the proceeds to purchase another suitable property. The trustees may need to be involved in the transaction, and the trust terms should be considered carefully before any sale takes place.
Can a life interest trust protect my children's inheritance?
A life interest trust can help protect the deceased’s share of an asset for their intended beneficiaries. For example, a Will could give a surviving spouse the right to live in the family home for their lifetime, while providing that the deceased’s share ultimately passes to their children. This can provide a balance between supporting the surviving spouse and ensuring that the deceased’s chosen beneficiaries inherit the capital in due course.
What happens to a life interest trust when the life tenant dies?
When the life tenant dies, their life interest will usually come to an end. The trustees will then administer the trust in accordance with the terms of the Will. This may mean that the trust property or the relevant share of it passes to the beneficiaries named to receive the capital. The precise outcome will depend on how the trust has been drafted and the assets held within it.
Can a life interest trust be challenged?
A life interest trust created by a Will can potentially become involved in a legal dispute, although the circumstances will determine whether there are grounds for a challenge. For example, a person may seek to challenge the validity of a Will or make a claim against an estate. A life interest trust does not automatically prevent disputes, which is why careful Will drafting and appropriate professional advice are important.
Do I need to own my house as tenants in common for a life interest trust?
If you want to leave your share of a jointly owned property in a life interest trust, owning the property as tenants in common is important. This is because each owner has a distinct share which can be dealt with under their Will. By contrast, property owned as joint tenants will normally pass automatically to the surviving owner when one owner dies. Your solicitor can explain which ownership arrangement is appropriate for your circumstances.
Does a life interest trust reduce Inheritance Tax?
No, unfortunately not as the value of the assets in the trust will be relevant on both the first to die’s death and on the death of the life tenant.
Certain Will trusts can receive specific Inheritance Tax treatment, so it is important to consider the tax position alongside your wider estate planning rather than assuming that creating a life interest trust will reduce the tax payable.
