What’s a Life Interest Trust in a Will?
05 April 2019
When making a Will, it's possible to include a Trust which gives someone a life interest in your property or other assets, without those assets actually leaving your Estate. For example, if you include a Life Interest Trust in your Will and your home is placed into this Trust, then the person with a life interest could continue to live in the property for the rest of their life, but on their death it would then be distributed in line with the terms of your Will.
A Life Interest Trust can be an effective way of ensuring that a loved one is provided for during their lifetime, while also protecting the value of your assets for future generations.
What Are Life Interest Trust Wills Used For?
When making their Wills together, many couples will leave everything they own to the other person, with it then passing on to their children when the second person dies. This is fine in theory, but can potentially cause issues in the future, and result in the Estate not being distributed in the way that they had hoped.
For example, if one person dies and the other then goes into care, then the value of their collective Estate could easily be swallowed up in care fees. Alternatively, if the second person goes on to remarry and fails to make a Will (or makes a Will leaving everything to their new spouse) then the children could end up with very little, or nothing at all. This is called the sideways disinheritance trap.
We look at how a Life Interest Trust Will can help to protect your assets against care home fees and the sideways disinheritance trap.
Protecting Your Assets from Care Fees
In England and Wales, if everything a person owns is worth less than £23,250, then the Local Authority will offer financial support to help with the cost of care fees. If they own assets that are worth more than this, then they will be responsible for covering their own care fees.
Let's use an example to illustrate how a Life Interest Trust can help to protect wealth from being swallowed up in care fees.
Mr and Mrs Jones are married with one daughter. They have made Mirror Wills which leave everything to the other person, with it then passing to their daughter on the second person's death. Their only substantial asset is their home, which they own outright and is worth £400,000.
When Mrs Jones dies, everything passes into Mr Jones' sole name. Mr Jones becomes unwell and moves into a residential care home, where he stays until he passes away 12 years later.
The care home fees come to £40,000 per year. As Mr Jones' Estate is worth £400,000, he is responsible for covering these fees himself. Over the 12 year period, his Estate is completely swallowed up by care fees. In the tenth year of his care home residency, his Estate drops below the £23,250 threshold and the Local Authority steps in to offer financial support.
In the end, Mr Jones' Estate drops below £14,250, at which point he becomes eligible for the maximum financial support from the Local Authority. When he dies, this £14,250 passes to his daughter, as the sole beneficiary of his Estate.
If Mrs Jones had included a Life Interest Trust in her Will, she could have ring-fenced her 50% of the property value by placing it into a Trust, while giving her husband a life interest in the property. This would entitle Mr Jones to continue living in the property for the rest of his life, or sell it to buy a new property to live in, or receive all of the property or sale proceeds outright if required.
In this scenario, when Mr Jones moves into the care home his personal assets amount to 50% of the property, at a value of £200,000. The other 50% of the property is held in a Trust. In the fifth year of Mr Jones' residency in the care home, the value of his assets drops below £23,250 and then falls to £14,250. For the final 7 years of his life, the Local Authority provides financial support for his care home fees.
When Mr Jones dies, the £200,000 value of the property that is held in Trust is passed on to his daughter, as the sole beneficiary of this Trust. She also inherits the remaining £14,250 in Mr Jones' Estate.
So by including Life Interest Trusts in their Wills, Mr and Mrs Jones would pass on £214,250 to their daughter, as opposed to £14,250.
Avoiding the Sideways Disinheritance Trap
The sideways disinheritance trap occurs when someone who has children from a previous relationship remarries after the death of their partner or spouse, inadvertently disinheriting their children. We'll use Mr and Mrs Jones again to illustrate how this could happen and how a Life Interest Trust can help.
Again, Mr and Mrs Jones have made Mirror Wills, leaving everything to each other, with it then passing to their daughter on the second person's death. In this scenario, after Mrs Jones dies, Mr Jones remarries and he and his new wife, Ms Smith, live in the property that Mr Jones owns outright. He is aware of the fact that remarriage revokes any existing Will, so he makes a new Mirror Will with his new wife, in which they again leave everything to each other and then evenly between his daughter and his wife's two sons (from her previous marriage).
When Mr Jones dies, his entire Estate passes to his new wife, Ms Smith, in line with the terms of his Will. She then makes a new Will which disinherits Mr Jones' daughter, leaving everything instead to her two sons. Mr Jones' daughter inherits nothing from her parents' Estate.
If Mrs Jones had included a Life Interest Trust in her Will, she could have ring-fenced her share of the property in a Trust, giving her husband a life interest in it. This would mean that he could continue living in it for the rest of his life, but on his death, Mrs Jones' share in the property would still pass down to her daughter.