Life interest trusts in Wills can offer the solution to ensuring a smooth transfer of assets to the next generation.
Writing a Will is an important act of insurance for our loved ones, but sometimes the complexities of our situation can end up staying our hand – or lead to mistakes.
One of the most common priorities when writing a Will is to ensure that the family home is protected and passed on to children without causing any unnecessary hardship for a spouse or partner. As we will see below, the risk is heightened if spouses have been married before, but further unknowns (such as future remarriage) could also have important implications for your assets.
In such scenarios, a life interest trust in a Will can provide a tailored solution. According to Bernard Seymour of Linder Myers Solicitors, it offers a flexible way of passing down assets while providing protection for a partner.
“It generally leaves a share of the deceased’s house to the children, but gives the spouse the right to live there for the rest of their life,” says Seymour. “As for money, the capital is left to the next generation, but the spouse receives the income for the remainder of his or her life.”
Some case studies illustrate how a life interest trust can help protect the assets and interests of all parties.
One second marriage
David has died and his widow Victoria has since married a businessman called Tony. It is Tony’s first marriage. The family home is in Victoria’s sole name, and Tony and Victoria agree that, if she dies, it should go to her children. However, Tony would still need somewhere to live after Victoria’s death.
Since Victoria has put a life interest trust in her Will, the home will belong to the children if she dies, but Tony will have the right to live there for life. This not only protects the house for the children, but also avoids the property coming under threat if Tony goes bankrupt.
“It also means that the house cannot be sold to pay for Tony’s care needs, if that becomes a requirement in the future, because it has already passed down to the children,” says Seymour. The life interest trust can also be worded to enable Tony to move to a smaller house – or for him to receive an income.
Two second marriages
Hillary and George were already widows when they met and married. They sold both family homes to buy a house together. They now live in this house with Hillary’s daughter and George’s children. Both of them want to ensure that, in the event of the other’s death, a share of the assets go to the children, so that their own children can benefit from their former family home.
Hillary and George have ensured that they own their home as ‘tenants in common’ with a 50% share each. They have also written a Will with a life interest trust and included a clause to ensure that their share in the home passes to their children when they die. Either one can continue to live there if the other one dies, but the other half’s 50% stake will then pass to the children of the deceased.
Whilst the surviving spouse is living in the house, he or she will pay normal outgoings, but not rent – and the children cannot sell the property. If the surviving spouse remarries, the deceased’s 50% share remains protected from any risk of bankruptcy or disinheritance because it has already passed to the children.
“Moreover, if one partner needs to enter care before either has died, under current law* the local authority cannot take the house into account when assessing the means of the spouse who is entering care, because the other spouse still lives there,” says Seymour. “If one spouse were to die and the other spouse to enter care, the local authority could only take into account 50% of the property as the other half has already passed down to the children of the deceased.”
Jackie and John each want to ensure that, when one of them dies that person’s share in their home will go to their own children, and not to a second spouse or that spouse’s family, if they were to remarry.
Jackie and John have a life interest trust and ensured that they are defined as ‘tenants in common’ for the property. In their Wills, they have each included a clause which ensures that their respective share in the home passes to their children. The benefits are the same as Hillary and George enjoy; so, too, are the restrictions placed on sale while either of them is living in the house. Although the usual outgoings will be due, neither will have to pay rent for living in the property.
*Correct as at December 2015
Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills and trusts are not regulated by the Financial Conduct Authority.