If you are making a will you may wish to preserve your property intact for a variety of reasons. Perhaps you built it with your own hands, or renovated it yourself.
Maybe you associate it with so many memories you can’t stand the thought of letting it go. Your spouse may even be a reckless spender and you don’t want your asset to deteriorate.
You may want the property to pass to a charity after you die; however at the same time your life partner might need an income, or somewhere to stay. Your answer could be creating a life interest trust. That way, you can control the future of your asset even after your spouse passes on.
How a Life Interest Trust Works in Practice
A life interest trust grants a right to someone that only lasts their lifetime. In our example, the person making the will wants their spouse to benefit from the property for as long as they live, but not actually own it. While they are alive their life partner could for example:
1… Occupy the property as a life tenant without paying rent
2… Rent the property to a third party and receive the rental as income
Life interests can apply to any asset. Other examples include investments, rent from other properties, and even a motor vehicle.
What Happens to the Asset after the Beneficiary Dies?
The asset remains part the estate of the person leaving the will. The executor can now dispose of the asset and share it among the surviving beneficiaries. In our example, ownership of the property would pass to the charity according to any supplementary conditions in the will.
Circumstances under Which a Life Interest Trust Makes Sense
The underlying purpose of any life interest trust is to preserve the capital value of the asset for a future purpose. However there may be supplementary reasons including the examples below.
1… There could be a child from an earlier relationship the testator would like to ultimately inherit the house
2… The life beneficiary under the life interest trust may marry, meaning her spouse could share the value with the child
Some Very Important Aspects to Keep in Mind
We have assumed the creator of the life interest owns the asset entirely for simplicity. However, a different approach is necessary where a property, for example is jointly owned with several people. In this instance the property will pass to the other owners after death and the trust will have no effect
Passing the free use of an asset to a spouse under a life interest trust is tax neutral. However, the asset returns to the estate upon the latter’s death whereafter it will be subject to inheritance tax as applying. If the trust is in favour of any other person the tax applies upon both the first and the second death. A life interest trust therefore needs careful thought before committing. We carry out probate valuation in Abbey Wood