Historically Trusts in Wills were predominantly used for Inheritance Tax Planning, but following the introduction of the Transferable Nil Rate Band in October 2007, Will Trusts are now used more for protecting assets and/or beneficiaries.
The nil rate band is the amount that can be left before inheritance tax is paid and now with the transferable nil rate band on 2nd death the estate could benefit from 2 nil rate bands and at the rate that is applicable at the time of the 2nd death, so currently a married couple (or civil partnership) would have £650,000 of tax free estate to leave on 2nd death.
NB. Spouses and Civil Partners do not pay inheritance tax no matter how much they inherit from each.
Any assets held in a Life Interest Trust remains for Inheritance Tax purposes in the estate of the Life Tenant and so does not negate the transferable nil rate band if applicable, but being in a Trust the assets are protected. Consideration should be given to a Life Interest Trust if;
• your spouse/partner may meet someone else after your death, and leave their estates to their new spouse/partner and or their family? Marriage revokes a will so this is not always done intentionally.
• the beneficiary(s) may need long term care?
• your beneficiary(s) may become vulnerable and subject to financial abuse by a third party – in some cases this is other family members?
• there is a chance that your beneficiary(s) may become bankrupt?
• you have disabled beneficiaries?
• you have children from a previous relationship and you are unsure how their relationship will be with your surviving partner if you die first?
For these and many other reasons Life Interest Trusts are now far more attractive.
How do they work?
Life Interest Trusts can be used to protect the whole estate of the 1st person to die however, they are more commonly used to protect property. Any property that will be the subject of a Trust has to be owned as Tenants in Common with the other party or parties. This is because jointly owned property passes by an Act of Parliament and so will not form part of a person’s estate when they die (other than for Inheritance Tax purposes) and will pass direct to the surviving joint owner(s).
NB. This applies to any jointly owned asset, not just property.
Once created (usually on the 1st death of a couple) the Life Tenant has the right to the benefit of the Trust for life (so this is any asset that is in the Trust as the word Trust just means the wrapper that protects the asset or assets). The Life Tenant therefore can live in any property that is in the Trust rent free and undisturbed; receive any income, including rental income as well as interest and income from investments and with Flexible Life Interest Trusts can also have access to capital lump sums. The Trust can also use assets within it to purchase other property so if the survivor decides to downsize for example the Trust can move with them and attach itself to the new property.
The Trust doesn’t have to be for the life of the Life Tenant, as other triggers can be built into the Trust to end it such as the remarriage of the Life Tenant.
For more information on this and any other issue please contact Mrs Angela Pelleschi or Mrs Emma Beckhurst at:
Jasper Vincent Solicitors, 9 Manor Court, Barnes Wallis Road, Segensworth, Fareham PO15 5TH
Telephone 01489 885788