Life Interest Trust

What is a Life Interest Trust?

Life Interest Trust is a type of trust written into your Will allowing benefits of an asset to be split between different parties.The Estate Beneficiaries who receive the property at the death of the Life Tenant(Trustee) are called the “Remaindermen,” typically, these are the children of a deceased parent from the first marriage who hold a “residual interest” in the property. They do not hold ownership at the same time, and the remainderman’s interest does not become activated until the death of the life tenant.

It's not uncommon for a parent to remarry after a divorce or the death of a spouse. In many situations, the remarrying parent may wish to grant a Life Interest or Right to Reside of the property to his/her second spouse. It's important to understand the precise nature of the rights and restrictions of a beneficiary, often specified in the Will of a deceased, or a trust. For example, the Trustee may only have the“right to occupy” a property in accordance with specified conditions (i.e. maintaining the property in good condition). This is known as a Right to Reside, and is much more restrictive than a Life Interest. Right to Reside does not allow the Trustee to rent or otherwise utilize the property for any other gain and typically ceases once the Trustee no longer occupies the property or fails to meet other conditions, leading to a forfeiture.

A Life Interest may have other restrictions placed on it, pursuant to conditions of the deceased’s Will. For example, the Life Interest may be limited to a maximum term or may terminate if the Trustee re-marries or becomes incapacitated.

Who Needs a Life Interest?

Life Interest Trusts are best suited for couples who are married or in a Civil Partnership. Having the Trust in place is a sensible option if you own your home and want to protect both your Beneficiary’s inheritance, as well as your Spouse’s right to live thereafter you die. Retaining a Life Interest in the property, providing that it passes to your children on your death, is not regarded as a Deprivation of Capital for purposes of local authority assessment for care fees. But developing case law may lead local authorities to enquire more carefully into these arrangements in the future.

Advantages of a Life Interest Trust

The key advantage of a Life Interest Trust is that, even after death, you can control who owns your property. You can be sure your surviving spouse or partner has the protection of being able to continue living in the home, while half the property will be passed to your main beneficiaries.

There’s also the guarantee that the remaining spouse’s half of the property can’t be used to pay for any long-term care fees. This is a practical way to avoid your asset’s value disappearing into paying for care. It also helps to avoid potential difficulties that may come about with a future re-marriage.

Disadvantage of a Life Interest Trust

While a Life Interest Trust is advantageous, it also has some drawbacks. When you die, your spouse or partner doesn’t automatically gain full control of the whole property outright –they only have the right to live there. This may not be an issue if you and/or your spouse are older, but it can present problems if you’re both relatively young.

When you’re young, your home is likely to be your biggest asset. Only being able to access half of its capital could bring financial problems that might not occur if a standard Will was in place. In this situation, a Life Interest Trust may not be the best option. There may also be further complications if you and your partner divorce and/or remarry.