Life interest trusts (also known as interest in possession trusts)

It is not uncommon to come across a life interest, trust that comes to an end when someone passes away.

Why are life interest trusts used?

Life interest trusts are used for a range of reasons to include safeguarding assets against long-term care fees, and ensuring that assets will eventually make it through to specific family members in terms of their capital value.

Life interest trust example 1

An example might be where a husband passes away and leaves his half share of the family home in to a life interest trust to benefit his wife. If his wife then entered long-term care after the husband’s death, his half share of the family home would be protected against long-term care fees. If his wife then entered long-term care, the husband’s half share could not be included in any assessment of her assets by the local authority.

Life interest trust example 2

Another alternative of this arrangement might be where a couple have married later in life and have children of their own from previous relationships. On the first death, the first to pass away may wish to allow their spouse or partner to benefit from their half share of the property that they own, for the rest of the survivor’s life. The first to die may eventuially wish their half share of the property to pass on to their own children, regardless of whether the surviving spouse/partner, remarries, etc. A life interest trust is useful in these circumstances as it means that there is a definite path set out as to how the first deceased’s share of the property would eventually pass. 

Usual terms

The usual terms of trust such as this are that the spouse or partner would benefit from the asset during their lifetime and eventually when that survivor passes away, the capital valeu fo that asset woudkl ten passs on to children.

Life tenant and remaindermen

These are technical terms used when describing who benefits from a trust. The life tenant is the person that benefits from the income or the use of the asset during their life. When they die the life interest usually terminates (comes to an end) and the remaindermen beneficiaries (in the example, above – the children) then benefit from the capital of the trust.

What must be done when the life interest terminates

Normally when a life interest trust comes to an end, it is a case of dealing with the relevant reporting requirements to the Revenue, ensuring that any Inheritance Tax is settled as appropriate. Matters can become somewhat complex, when the life tenant of a life interest trust dies as there may be Inheritance Tax attributable to both the free estate of the person who has died (their own personal assets) and also separate Inheritance Tax attributable to the trust. It is important that this is calculated correctly as otherwise the wrong parties may end up paying more Inheritance Tax than they need to. 

After the reporting requirements have been dealt with, reference should be made to the Will (or other trust instrument that created the trust) to see who now benefits from the trust and in what way. Normally it will be the case that the remaindermen beneficiaries will receive the capital value, and therefore the trust can either be encashed or assets can be transferred out to the beneficiaries.

Occasionally, they will be ongoing further life interest or other trusts that then apply after a life tenant dies.

Simply put, once it has been established as to the trust then benefits, the assets should then be administered in favour of the beneficiaries who then benefit by the current trustees.