Overview
This is commonly used for families with more complicated set ups i.e. second marriages where there are children from previous relationships. Trusts are a good way to protect assets for children while allowing your spouse or civil partner to still benefit from the asset.
A Life Interest Trust is similar to a Property Protection Trust, with the difference being you can put any of your estate into trust rather than just your property. This trust allows a person, normally your spouse or civil partner (known as the life tenant), to have the right to use and enjoy certain assets, such as property or income generated from investments, for the duration of their lifetime. After the life tenant’s death, the assets held in the trust pass to one or more other individuals, known as remainder beneficiaries (normally your children).
This would be a good option for anyone who holds assets in their sole name, where they would like to provide for a spouse or partner for life, but ultimately for their children or other named beneficiaries to have the final benefit of the assets.
Advantages of a Life Interest Trust
1. Security for Surviving Spouse
The main benefit for a Life Interest Trust is the security it offers to your spouse or partner. It would allow them to remain in the family home and have the benefit of the other assets in trust during their lifetime.
2. Protection of Assets
Assets put into a Life Interest Trust are protected from care home fees and will not be used for means testing. It means these assets are protected for the benefit of the children after the life tenant has died.
3. Safeguarding Assets for Children
Putting assets into a Life Interest Trust protects those assets for the ultimate beneficiaries of the trust, normally your children, where a surviving spouse remarries. If a surviving spouse remarries, the assets in trust cannot be inherited by the new spouse. This avoids sideways disinheritance which occurs, when most often, children of a first marriage do not inherit their intended share of an estate due to remarriage.
Disadvantages of Life Interest Trust
1. Control
The life tenant could only have access to the interested generated from the assets in trust rather than the capital itself. This could be limiting if the life tenant requires large sums of money.
2. Complex
There are extra costs involved in setting up a trust on death of the first spouse and will require legal advice.
3. Length of Trust
Life Interest Trusts can last for a long time and most will only end on the life tenant’s death. Ensure your Trustees are aware of their rule with administering a Trust.
4. Family Disputes
A Life Interest Trust can causes issues if the ultimate beneficiaries feel the life tenant is misusing the trust assets.