If you’d like to make things easier for your family after you’re gone, a will is essential. But it’s not a 100% fool-proof way to pass on your estate. Care fees, remarriages, divorce and bankruptcy can all water down your legacy. So, what’s the answer, for those who want to be make sure their assets are protected for their family? Making a will with a life interest trust.
What is a life interest trust will?
A life interest trust will is a way to provide for your partner, while protecting your home and savings from potential threats that could reduce your children’s inheritance. It does this by putting puts your home, savings and other assets in a trust when you die. This protects them from being:
- Used in care home fee assessments, or taken by the council to pay for your partner’s care (although a trust should not be used to avoid paying for your own care fees)
- Inherited by someone you haven’t chosen — even if your partner remarries, changes their will or has children from another relationship.
- Taken by creditors or given away in divorce settlements.
How does a life interest trust will work?
When you make a life interest trust will, you choose to put all or some of your estate in a trust when you die. Property, money and other assets like stocks and shares can all go in the trust.
Typically, you would give your partner a life interest. This means they can live in your property rent-free and benefit from any income generated by the money and assets in the trust. You can decide how long they get this — for the rest of their life, or for a set period.
Your children would be the beneficiaries (sometimes called ‘remaindermen’) and would inherit everything in the trust when your partner died.
You also choose trustees: people who will manage the trust. They could be anyone: your partner, your children or someone else entirely.
Could my partner still sell my home if they wanted?
It’s up to you. But it’s likely that your partner will want to downsize at some point, so it’s generally best to set up the trust so that they can sell if they want to.
What would happen is that your partner and the trustees would have to arrange the sale together. Their new home would be held in the trust, just like the old one. As before, they’ll be able to live there rent-free for as long as the trust states.
You can use your life interest trust will to say what should happen to any money left over after your partner has bought the new home. Typically, it would be invested to give them some extra income.
A property protection trust is a specific type of trust in a will that gives extra protection to property (it’s in the name). If your whole estate is worth more than £650,000, and includes a home, it’s recommended that you add a property protection trust to your will alongside your life interest trust.
What does it mean if it’s a ‘flexible’ life interest trust?
If the trust isn’t flexible, your partner can live in the home, but they can’t access any money in the trust. They only benefit from the income from the trust.
A flexible life interest trust will is different because it allows your trustees to loan or give your partner or your beneficiaries money from the trust at any time.
So, a flexible trust is better if you want your partner and children to be able to use the money or assets in the trust whenever they need it. A non-flexible trust is better if you’d like them untouched until the trust ends.
A typical life interest trust example
So, how does that work in practice? Here’s a typical scenario:
Terry and Julia are a married couple with a house and two kids, Sophie and Oliver. They make life interest trust wills together.
When Terry dies, his half of the house and his savings go into the trust. Julia has a life interest, Sophie and Oliver are the beneficiaries, and Julia, Sophie and Oliver are all trustees.
Let’s see what happens.
Care home fees
As Julia gets older, she may need social care to help her cope. This can cost more than £50,000 a year — a lot for anyone to manage.
Whether or not you pay for social care depends on your assets. If Julia’s savings and her home are worth more than £23,250, the council will make her pay for all her care herself each year. It will only stop when she has less than £23,250 left.
- Without the life interest trust, the council could claim all the money from the sale of Terry and Julia’s house, all of Julia’s savings, plus all the savings Terry left her.
- With the life interest trust, the council can only claim the things Julia owns by herself. Half of the money from the sale of the house and all of Terry’s savings are kept safe in the trust for Sophie and Oliver.
Remarriage
3 in 5 men and 1 in 5 women remarry after losing their partner. These new marriages make any previous wills invalid.
So, let’s say Julia remarries, this time to Steve, and doesn’t make a new will before she dies (or does, and leaves everything to Steve). That means:
- Without the trust, Steve would eventually inherit all or most of Terry’s estate through Julia. Terry’s children, Sophie and Oliver, might not get anything.
- With it, Steve can only inherit Julia’s savings and her half of the house. This is because Terry’s assets are in the trust, and so don’t belong to Julia.
A life interest trust also protects assets in case someone gets divorced. If you split with a partner, your inheritance is not automatically excluded from the assets to be divided up.
Family fall-outs
Life interest trust wills are popular among blended families – especially where there are children who have a shaky relationship with their step-parent.
This is because the trust protects your children and your partner in case there’s a falling out. In our scenario:
- Sophie and Oliver can’t force Julia out of the home or refuse her any income when Terry dies.
- Julia can’t disinherit Sophie and Oliver with a new will or spend all of their inheritance, either.
Debt
One last benefit: if Julia, Sophie or Oliver get into debt, the trust ALSO keeps Terry’s legacy safe from creditors.
This is especially important if there’s a home involved. Orders for sale for jointly owned properties don’t often come off, but it is a possibility. The trust keeps the family home out of creditors’ hands.
You shouldn’t make a trust in your will just to avoid care home fees. If the council thinks you’ve deliberately deprived them of assets they can ignore the trust and consider the property in their assessment.
What does a life interest trust do to inheritance tax?
If you’ve made a life interest trust as part of a will, the assets in the trust won’t be taken to pay off your inheritance tax (IHT) bill when you die. Instead, they’ll be treated as belonging to the person with the life interest. So any IHT due will be paid when they die.
If your family decides to end the trust ahead of time, things get a little more complicated. It’s best to work things out with a legal professional to make sure you all don’t pay more tax than you need to.
How much does a life interest trust will cost?
Trusts can be incredibly complicated. If you’d like to add one to your will, it’s vital to ask a professional to set it up for you.
At Beyond, we offer fixed-fee life interest trust wills for two people for £1,434.
For estates worth more than £650,000, we recommend adding a property protection trust. The two together, again for two people, costs £1794.
This is a little more than our simple couple’s will (at £135) but in the long run it can save your family hundreds of thousands of pounds in care home and legal fees.
It’s also stress-free: just give us a call on 0800 054 9793 for a free, no-obligation consultation about your needs. If you’d like to go ahead, we’ll set up a visit or a call (if you prefer) to finish the property trust will. It’s quick, easy and professional.