Life Interest Trusts – a useful Will structure for blended families

In our modern society, it is common for family units to include parents in their second marriages, with children from both marriages or previous relationships. Such blended families may include step-parents and step-children and step-siblings and half-siblings. A frequent concern of couples with children from a previous relationship or marriage is how they might leave their wealth such that their spouse is financially comfortable for the rest of their life, while ensuring that their wealth is left to their own children or other beneficiaries of their choosing. A fear of your spouse remarrying after your death and your own children “missing out” on inheriting from your wealth is a recurrent anxiety for individuals in blended families.

A life interest trust structure within a Will is a mechanism which ensures control over where assets end up. To illustrate how a life interest trust works, I will use an example of a couple: husband X and wife Y. X has two children, A and B, from a previous relationship, and Y has a daughter, C, from her previous marriage. Together, X and Y also have a son, D. While X and Y have a largely harmonious family unit, they do not wish to leave wealth to their respective step-children, instead preserving it for their own biological children. X and Y each make Wills whereby they leave their estates on the terms of a life interest trust for the benefit of the other of them, and thereafter to their own biological children.

In the instance that X dies first, Y has the right to use and benefit from X’s estate for the rest of her life as the “life tenant”. Y may be able to live in property owned by X’s estate, or receive income through rental properties or dividends paid on shareholdings. However, Y does not inherit the underlying capital and so cannot dispose of X’s assets as if they were her own. This means that should Y remarry following X’s death, Y could not pass on any of X’s assets onto her new husband. Instead, the capital in X’s estate is then held for X’s children, A, B and D, on the terms of X’s Will. The capital can then be divided between X’s children either upon Y’s death or such earlier time as wealth is accelerated onto X’s children out of the life interest trust. On Y’s death, then her estate is split between her children, C and D.

It is worth noting that, should the executors of the life interest trust in X’s estate appoint any wealth out into Y’s hands absolutely, then Y is at liberty to leave that wealth how she wishes. The protective layer only operates for assets which are held under the terms of the life interest trust.

There are also opportunities for inheritance tax planning which can arise as a result of the life interest trust structure, but this is not the focus of my blog post. While the life interest trust can exist for the duration of the lifetime of the survivor of a couple, such trusts can also include what are called overriding powers of appointment. These powers allow the executors to bring the life interest to an end prematurely or otherwise pass on capital sums to the relevant beneficiaries. If assets are appointed out to other beneficiaries besides the other of the couple (such as children), and the survivor lives another seven years following that appointment of assets, then the assets in question will pass to the intended beneficiaries without any inheritance tax being paid on the assets, owing to spousal relief.

Overall, this Will structure can ensure that there is no inheritance tax on the first death of a couple, as much scope as is possible for planning after the first death and also protection of a couple’s respective wishes for the ultimate destination of their assets.

• By Celia Gould, Trainee Solicitor