What is a Life Interest Trust?
5 minute read
A Life Interest Trust allows you to support your partner today while protecting your children tomorrow.
When someone wants to provide for their partner after they die, while also making sure their children ultimately inherit, they often face a genuine tension. Leaving everything outright to a partner may feel generous, but it can leave children exposed to circumstances beyond anyone’s control. Leaving assets directly to children can feel like it fails to protect the partner.
A life interest trust is one of the most widely used tools in estate planning precisely because it resolves that tension. Also known as an interest in possession trust, it is a structure built into your will that allows you to look after two sets of people at once: those who need the benefit of your assets during their lifetime, and those who should ultimately receive those assets when that time has passed.
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How Does a Life Interest Trust Work?
At its core, a life-interest trust is a trust created in your will. It involves three key parties:
The settlor. This is you, the person making the will. You decide which assets to place in the trust and set out the rules.
The life tenant. This is the person who benefits from the assets during their lifetime. In most family situations, this will be your spouse, civil partner, or long-term partner.
The remaindermen. These are the people who inherit the underlying assets after the life tenant dies. In most cases, these will be your children.
The will instructs your trustees to hold certain assets on behalf of these parties. The life tenant receives the benefit of those assets for as long as they live. Upon the life tenant’s death, the assets pass outright to the remaindermen.
The trust does not end when you die. In fact, it only becomes active at that point. Your trustees take responsibility for managing the trust assets until the life tenant’s death, at which point the trust comes to an end and the assets are distributed to the final beneficiaries.
What Does a Life Interest Trust Look Like in Practice?
The most common example involves a family home.
Suppose you are married, you own your home jointly with your spouse, and you have children from the relationship. When you die, your half share of the property does not pass outright to your spouse. Instead, it passes into a life interest trust. Your will states that your spouse, as the life tenant, has the right to continue living in the property for the rest of their life. When your spouse eventually dies, your share of the property passes to your children.
The arrangement is straightforward for everyone involved. Your spouse does not need to move out. They are not displaced or disadvantaged. But your share of the home is held securely within the trust, ring-fenced from circumstances that might otherwise put it at risk.
The same principle applies to other assets. If you hold investments, savings, or other capital, your will can direct those into a life interest trust. Your partner would then receive the income generated by those assets during their lifetime, whether that is interest from a savings account or dividends from a portfolio. The underlying capital itself, however, remains intact within the trust for the benefit of the remaindermen.
Why Do People Use a Life Interest Trust in Their Will?
Life interest trusts are most often chosen when people want to manage the risk that a surviving partner’s circumstances might change in ways that affect the ultimate beneficiaries. There are three risks that come up most frequently.
Protecting Against a Change of Will
If you leave your assets outright to your partner, your partner is free to change their own will at any time. They might later decide to leave your assets to a new partner, to charity, or to other family members. A life-interest trust prevents this from happening to the assets you place in it. The trust rules you set out in your will are legally binding. Your partner simply does not have the power to redirect those assets elsewhere.
Protecting Against Remarriage or a New Relationship
If your partner remarries after your death, any assets held outright could potentially pass to their new spouse under the rules of intestacy or under a new will. Under certain circumstances, remarriage can affect prior estate plans. A life-interest trust insulates your share of the assets from these risks. The trust continues on the terms you originally set, regardless of what happens in your partner’s personal life after you are gone.
Protecting Against Care Fees
This is perhaps the risk that concerns people most. If your partner later needs residential or nursing care, a local authority means test will generally take into account assets they own outright when assessing whether they need to contribute to the cost of their care. Assets held within a life interest trust are not owned outright by the life tenant. Because the life tenant only holds a right to benefit from the assets, rather than owning the capital itself, those assets may be treated differently for the purposes of a means test
What the Life Tenant Can and Cannot Do
This is one of the most important points to understand, and it is worth explaining clearly to anyone considering this type of trust.
The life tenant has the right to benefit from the trust assets. But they do not own those assets. The capital belongs to the trust, and ultimately to the remaindermen.
In practical terms, this means that if the property forms part of the trust, the life tenant can live in it but cannot sell it and keep the proceeds. If the trust holds investments, the life tenant can receive the income generated, but cannot draw on the capital fund itself.
This has real implications. If your partner falls into financial difficulty after you die, they will not be able to sell the trust assets to resolve that difficulty. If they need funds for care, home repairs, or other significant expenses, the trust does not automatically provide them. This can create hardship if it is not anticipated.
Experienced will drafters can include carefully worded provisions to address this. For example, a trust can be drafted to give trustees the power to advance capital to the life tenant in appropriate circumstances, or to allow the life tenant to move into a different property without the trust collapsing. The key word is “carefully.” A trust that is drafted too rigidly may leave a surviving partner in a very difficult position. A trust drafted too loosely may not provide the protection originally intended.
This is why professional will drafting really matters when a life interest trust is involved. The terms of the trust need to reflect your actual wishes and anticipate the likely circumstances of the people involved.
A Note on Tax
Life interest trusts also have specific inheritance tax treatment in England and Wales. Where the life tenant is the spouse or civil partner of the person who died, an immediate post-death interest trust (as it is technically known) will typically qualify for the spouse exemption, meaning no inheritance tax should arise when the first spouse dies.
When the life tenant eventually dies, the trust assets are treated as part of the life tenant’s estate for inheritance tax purposes. This is something to factor into broader estate planning.
The interaction between trusts and inheritance tax is a detailed subject in its own right, and the rules can vary depending on how the trust is structured. If tax planning is a significant concern for you, it is worth exploring this alongside your will.
Is a Life Interest Trust Right for You?
A life interest trust is not the right choice for everyone. In simpler family situations, or where both partners own assets in their own names and have the same children, a straightforward mutual will or a direct gift may be entirely appropriate.
A life interest trust tends to be most valuable where one or more of the following apply:
You are in a second marriage or relationship, and you have children from a previous relationship. You want to provide for your current partner, but you are concerned that your children’s inheritance might otherwise be affected.
You own property jointly, and you want your partner to be able to stay in the home, but you also want to ensure that your share eventually passes to your children rather than being redirected elsewhere.
You have concerns about your partner’s potential care costs in later life, and you want to take reasonable steps to protect your share of the estate from a future means assessment.
You want to prevent your assets from passing outside your family if your partner later enters a new relationship.
If any of these circumstances apply to you, it is worth speaking to a specialist will drafter who can explain the options available and make sure that whatever you choose is accurately and properly expressed in your will.
How We Can Help
Drafting a life interest trust requires more than simply inserting a standard clause into a template Will. The trust needs to be tailored to your circumstances, your assets, and the people involved. The powers given to the trustees, the rights of the life tenant, and the provisions for the remaindermen all need to be expressed clearly and correctly.
Our will-drafting service is designed to make this straightforward for you. We guide you through the decisions that matter, explain the implications in plain English, and produce a will that accurately reflects your wishes.
If you would like to find out more or are ready to get started, contact us directly to speak with one of our will specialists.
Frequently Asked Questions About Life Interest Trusts
What is the difference between a life interest trust and an interest in possession trust?
They are two names for the same type of arrangement. A life interest trust is the everyday term, while “interest in possession trust” is the more technical legal description. Both describe a trust in which one person (the life tenant) has the right to benefit from the assets during their lifetime, and those assets then pass to others (the remaindermen) upon the life tenant’s death.
Can a life tenant be removed from a life interest trust?
Generally, no. Once the trust is created and the testator has died, the life tenant’s right to benefit from the trust is legally protected by the terms of the trust. However, if the trust deed includes specific provisions allowing the trustees to vary or end the trust, or if all the beneficiaries agree, it may be possible to bring the trust to an end early. This will depend on the specific wording of the Will and the circumstances involved.
What happens to a life interest trust when the life tenant dies?
When the life tenant dies, the trust comes to an end. The trust assets pass to the remaindermen, who are the final beneficiaries named in the will. Depending on the assets, this might involve transferring property title, distributing an investment portfolio, or paying out a sum of money.
Does a life interest trust protect against care home fees?
A life interest trust may offer some protection because the life tenant does not own the trust assets outright; they have only the right to benefit from them. However, the rules around care funding and means testing are complex, and local authorities can look carefully at whether a trust was created to deliberately avoid care fees. This is an area where specialist advice is important, and the answer will depend on the specific facts of the case.
Can a life interest trust be set up over the whole estate?
Yes, in principle. A life interest trust can be set up over the whole of an estate or over specific assets, such as a property or an investment portfolio. The right approach depends on your circumstances and your wishes. In many cases, people set up a life interest trust over their share of the family home and leave other assets in a different way.
Who should act as trustee of a life interest trust?
Trustees have a duty to act in the interests of all the beneficiaries, both the life tenant and the remaindermen. This can put them in a difficult position if a conflict arises. Many people appoint a combination of family members and a professional trustee, or two family members whom they trust to act fairly and objectively. The choice of trustee is one of the most important decisions in drafting this type of will, and it is worth careful consideration.
Is a life interest trust expensive to set up?
The cost of including a life interest trust in a will depends on the complexity of the arrangement and the drafter you use. It will typically cost more than a simple will, reflecting the additional drafting work involved. However, the cost should be weighed against the protection it provides. A poorly drafted trust, or no trust at all where one was needed, can lead to significant financial and family difficulties that are far more costly to resolve.
Disclaimer
This article is intended as general information only and does not constitute legal advice. The information refers to the law of England and Wales. Tax thresholds and legal rules are correct at the time of writing but are subject to change. We recommend that you seek professional advice regarding your own circumstances.
Bio
This article was written by Stephen Rhodes. Stephen was called to the Bar of England and Wales in 1999 and brings over 25 years of in-house experience working with solicitor firms across the Manchester area, with a specialism in Wills and Probate. He now focuses exclusively on will drafting, helping his clients ensure their loved ones are taken care of exactly as they would wish.