What Is A Life Interest Trust And What Can It Do For Me?

A Life Interest Trust (LIT), also known as an Interest in Possession Trust, is a document that names one or more beneficiaries to an estate and their entitlement to an income from assets held in trust over their life time. This person is known as the Life Tenant. If that asset is a house or property, then the Life Tenant is entitled to either the rental income on the property if it is rented out, or to live in the property if they wish to. However, a Life Tenant is not entitled to receive any of the remaining capital from the Trust.

Can there be more than one beneficiary?

Yes, there can. The Trust can also name other beneficiaries who are entitled to the assets in the Trust once the Life Tenant has died. They are known as Residuary Beneficiaries or Remainder men. However, while the Life Tenant is alive they do not receive anything from the Trust unless the Life Tenant agrees to a distribution of the assets.

Who does a LIT protect?

While most people are now seeing the benefits of making a will, circumstances can change. LITs are designed to protect the children of a marriage or Civil Partnership in the event that one partner dies and the other remarries. If the will has not been rewritten, once the second partner has passed on the entire estate will pass to the surviving partner. This could mean that the children of the original partnership lose out on any inheritance. By drawing up a Life Interest Trust, the children of the original partnership are guaranteed to inherit at least some of the estate. While a will gives the surviving partner a life interest in his or her share of the property, a LIT ensures that other members of the immediate family are not denied any inheritance that the original partnership entrusted to them.

What else can a LIT do?

You can make specific requests or instructions on a Life Interest Trust. As a Trust is overseen by Trustees, you can give them specific instructions as to how you would like the Trust to be managed. For example:

• You can give the Trustees the power to either give or lend capital from the estate to the Life Tenant at their discretion
• Where a property is involved, you can specify that if the Life Tenant wants to vacate the property they can then direct the Trustees to sell that property and buy another for the Life Tenant to occupy
• You can give specific instructions as to how you would like any capital in the Trust to be invested.

Taxes

A Life Tenant is treated by the Treasury as owning all of the assets held in Trust. Therefore, if the assets are higher than the Inheritance Tax threshold, the Life Tenant will be responsible for paying any taxes due on the estate. There are no Inheritance Tax benefits to LITs.

Any income (such as rent) from the Trust belongs to the Life Tenant and is therefore taxed according to the beneficiary’s personal income tax rate. No additional income tax is paid by the Trust.

If the assets held in Trust increase in value (such as the value of a property increasing) then Capital Gains Tax may be owed when the property is sold. The Trust will have an annual allowance that can be used to offset the gain. Property that is occupied by the Life Tenant is not taxed.

One major advantage of the LIT is that it protects the assets in the Trust from being used up during the lifetime of the Life Tenant. So if a Life Tenant goes into full time nursing care, the local authority cannot take the assets in the Trust to pay for the care of the Life Tenant.

A Life Interest Trust is particularly useful if a couple has children and want to make sure that they benefit from the estate of either partner. However, they are complex documents and can form part of a Will, so it is best to talk to an expert if you are thinking of creating a Life Interest Trust.