Life Interest Trust Adv & Disadvantages

[talkingcashstuff]

Just that really. Making a will, considering setting up a life interest trust. We are a couple not married one child whos an adult.
im a bit confused about it all and will be asking solicitor questions but what are the general advs & disadvs?
What % of people do this?
Main concern is if surviving person downsizes who gets the released equity?

My concern would be if the surviving partner needed to downsize and release equity. So use their share of the sale to purchase a home but needed some of the equity to live on.

I'm not a lawyer at all, but there's a house in the family (originally my grandad's house) which DM has a life interest in. After that it comes to me, according to the terms of my grandad's will, which set up a trust for this.

As far as I know, if DM sold the house, then she would have the right to invest the proceeds and benefit from any income from that (e.g. she could sell the house, stick the money in a savings account, and any interest would be hers to spend as she pleased). But the capital amount, the original proceeds of the house sale, would need to come to me on her death. She couldn't spend that away on living expenses.

I assume she could sell the house, downsize, and spend part of the capital on a new, smaller house to live in (and the smaller house would then come to me on her death). But the rest of the capital would still have to come to me eventually. She would be entitled to the interest on it, but not to spend away the actual capital.

Or - instead of selling - she could presumably rent out the original house, use some of that rental income to rent a smaller house, and use the rest of the rental income for living expenses?

Definitely something to be discussed with a proper solicitor, though, because I'm no expert.

In your situation it is probably a good idea.

The surviving partner will get a life interest, which means they effectively get use of the property or funds until they die and then it passes to the child. It doesn't restrict downsizing as that can be done with the consent of the trustees.

The wording is very important as I have seen plenty of Wills that have been incorrectly drafted by solicitors and do not have the required effect. Please make sure you use someone with proven experience to draft the Wills and the Life Interest trust.

The main issue to consider is the ongoing costs of the trust during the lifetime of the surviving partner.

I’m a lawyer. I did do wills and probate and now I do adult social care for a local authority. Don’t do it. My parents did and I changed their will. Local authorities are going bankrupt and cannot afford care home fees. You need to ensure you have enough money for care when you are older. I will not be locking my money up as I want it to be available for the best care in the best place if I need it.

I would agree with this if the OP was married, but with a child and an unmarried partner I would prefer to see my capital go to my child than be used to fund my partner's care in later life (if they haven't spent it or re-married in the mean time).

If you go ahead with this, you should ensure that your home is owned as tenants in common, not joint tenants (assuming you own it jointly). That way, when one of you dies half the house will go into the life interest trust.

Life interest trusts these days are written so that the surviving partner can downsize. What happens to the equity released depends on the wording of the trust. It could be 50% for the surviving partner and 50% for your child, for example.

With respect to care home fees, the surviving partner's 50% of the house will still be available for that. Also, the 50% of the property that is in trust is not counted by the council when assessing care fees. Re a previous poster's concern about councils, a council cannot technically go bankrupt. They issue a Section 114 notice which puts them into administration, but care home fees and services for residents of LA-owned care homes will continue without immediate disruption.

The main reason many people go down this route is that it will guarantee that your child will inherit from at least one parent. Without a life interest trust, the surviving partner could remarry without making a new will, or make a new will disinheriting your child, or fall into the clutches of a fraudster, or have to spend everything on a care home, leaving your child inheriting nothing. With a life interest trust, your child is guaranteed to inherit from the first partner who dies regardless of what the surviving partner does.

This is exactly what i am thinking, Ive seen some care homes and they weren’t good, I think I would rather have the choice of a decent care home if i need it.
I couldn’t imagine having half of my parents house and them being in a crappy home, I don’t think my daughter would want that either

Yes, also thinking of maybe needing to downsize just to pay for living expenses if only one of is alive, we don’t really have pensions or savings to fall back on.
I don’t think its a great idea in your 50s what if one of us dirs and the ither wants to downsize and buy a caravan by thr sea or travel or something?
im not sure if the equity would go into a trust account for my daughter at that point or if the surviving person could still use it (i think its the former not the latter but im checking that out)

I think this is probably right from what ive read but I am going to check)
Maybe if we were older, settled in a forever home with no mortgage etc it would work but for now I think too many different things coukd happen

We have been together for decades so as good as married in our eyes but not legally obviously, we are discussing civil partnership which would be included in the will

If this situation arose, your daughter could assign her interest in the life interest trust to the tenant (i.e. the surviving partner), bringing the trust to an end. However, she would not be compelled to do so.

To put some figures on how likely this is to be a problem, only 1.6% of 65-74-year-olds use formal adult social care. This rises to 11.7% for those over 85. Note that these are the figures for any form of adult social care. Overall, only 2.5% of people over 65 are living in care homes. Those that do live in care homes stay less than 1.5 years on average. Of course, some stay much longer. But there is a good chance you won't need a care home at all and, even if you do, half your home may be more than enough to cover the fees.

I'm not saying a life interest trust is the right way to go for you. You need to consider all the pros and cons, and take professional advice.

There are two different types of trusts that you might be considering.

In one case, you put your entire house into a trust now while you're still alive and carry on living there. A pp mentioned about local authorities ignoring a trust - it is these sorts of trust that they may ignore.

Some local authorities may accept that the house has legitimately been put into a trust but they may equally decide that you have deliberately deprived yourself of assets and treat you as though you still owned the house. It seems to be pretty much a coin toss as to whether this will work.
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In contrast, the other type of trust is where you change the ownership of your home so that you own 50% each.

Most homes are owned by a couple as "joint tenants". This is where you both jointly own the whole house (just like a joint bank account). So, when one of you passes away the house automatically goes to the surviving spouse.

If you own the house as joint tenants then the house automatically passes to the surviving spouse regardless of what any will might say.

So, if your DH were to pass away first then you would get everything and it would be quite open to you to get involved with a younger gigolo and then leave everything to your young lover (or the local cat's home charity etc) when you eventually pass away so that your children get nothing.

I'm sure that you wouldn't do anything like that but you do read stories on MN about that happening.

Likewise, you could pass away first and then your DH remarries and leaves everything to his new wife. Again, plenty of stories on MN about this as well.
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The other way to own a home is as "tenants in common". In this situation you each own a separate 50% of the home and you can leave your own 50% to whoever you like. In this situation it is usual for each spouse to leave their 50% to their children (but you can leave it to whoever you like).

So, if your DH were to pass away first, then you could still give your 50% of the house to your gigolo but you couldn't give your DH's half of the house to him. Likewise if you were to pass away first then it would protect 50% of the house going to any new wife.

In the same way that 50% of the house is protected from any gigolo or fancy woman (or cat's home charity) like this it is also protected from being taken for care fees.

OK, so where does the trust come in?

This is largely to protect the surviving spouse from being turned out of the home.

There is nothing at all to stop you leaving your 50% directly to your children. Assuming that they're over the age of 18 then your share of the house passes directly to them in your will.

This means that they own 50% of the house and your surviving DH owns the other 50%.

They can then get a court order to force the sale of the house and turn your DH out. (or vice versa if you're the surviving spouse).

The trust stops this from happening. It says that the surviving spouse has the right to continue living in the house until his death (or other event mentioned in the will eg remarriage). This stops them being kicked out of the house by the children.
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"Main concern is if surviving person downsizes who gets the released equity?"

Wills are usually written to allow the trustees of the trust to sell their share of the house and invest in any new house that is purchased and the trust will then own an appropriate percentage of the new house.

But, any money not used to purchase the new house stays in the trust and the interest goes to the life tenant.

For example, suppose the surviving spouse lives in a house worth £500k, of which they own 50% and the other 50% belongs to the trust.

The surviving spouse wishes to downsize and the trustees agree to use part of the trust to purchase 50% of the new house.

The new house, along with stamp duty etc, costs £300k. This leaves £200k cash of which £100k belongs to the surviving spouse and £100k belongs to the trust.

The surviving spouse can do anything they like with their £100k - blow it on a round the world cruise, give it to their young lover or to the local cat's home charity etc.

With the £100k that belongs to the trust, that is a different story. The beneficiaries of the trust do not get their hands on the money until the surviving spouse passes away (or any other condition in the will eg remarriage or cohabitation).

The money must be invested and any income (eg interest or share dividends) is paid to the surviving spouse but any capital growth stays in the trust. Trustees must balance the interests of the surviving spouse and the beneficiaries of the trust.

For example, if you put £100k in a savings account. According to Moneysavingexpert, the top rates at the moment are around 4.5%. So £100k in a savings account could earn £4,500 per year in interest and that must all be paid to the surviving spouse.

That's great for them but not so great for the children.

Alternatively the trustees could invest in things that go for capital growth and don't provide any dividends at all. Great for the children, not so great for the surviving spouse.

However, trustees are required to take the interests of both parties into account (unless the will says otherwise) when deciding what to invest in.

This would normally be done by selecting a mix of investments, some of which concentrate on capital growth (good for the children) and some which concentrate on providing income (good for the surviving spouse).

I really would recommend that you speak to a qualified advisor about this when/if the time comes.

Then, when the surviving spouse finally passes away, the assets of the Trust can then be passed out according to the will.

@Another2Catsthanks for a very comprehensive reply, thats how I understood it to be.
I will be asked the solicitor some questions but for now i think we have decided it’s not for us, maybe when we are older and more settled

@prh47bridgethanks, lots to think about!

@talkingcashstuff Due to IHT, all of our unmarried friends have quietly got married! All with adult dc and money! Life becomes easier in other ways too.

I’m sorry to hijack the thread slightly but I have a question for @Another2Cats
Up thread you said,

Wills are usually written to allow the trustees of the trust to sell their share of the house and invest in any new house that is purchased and the trust will then own an appropriate percentage of the new house.
But, any money not used to purchase the new house stays in the trust and the interest goes to the life tenant.
For example, suppose the surviving spouse lives in a house worth £500k, of which they own 50% and the other 50% belongs to the trust.
The surviving spouse wishes to downsize and the trustees agree to use part of the trust to purchase 50% of the new house.
The new house, along with stamp duty etc, costs £300k. This leaves £200k cash of which £100k belongs to the surviving spouse and £100k belongs to the trust.
The surviving spouse can do anything they like with their £100k - blow it on a round the world cruise, give it to their young lover or to the local cat's home charity etc.
With the £100k that belongs to the trust, that is a different story. The beneficiaries of the trust do not get their hands on the money until the surviving spouse passes away (or any other condition in the will eg remarriage or cohabitation).
The money must be invested and any income (eg interest or share dividends) is paid to the surviving spouse but any capital growth stays in the trust. Trustees must balance the interests of the surviving spouse and the beneficiaries of the trust.
For example, if you put £100k in a savings account. According to Moneysavingexpert, the top rates at the moment are around 4.5%. So £100k in a savings account could earn £4,500 per year in interest and that must all be paid to the surviving spouse.
That's great for them but not so great for the children.

Do you know If a trustee does go ahead and sell the property and buys a smaller one do they, by law, have to inform the beneficiaries of the trust that they are selling and where the leftover money will be invested? Or can they just sell up and squirrel the money away without letting on to the beneficiaries that they’ve done this?
Also would the beneficiaries/trust also have a 50% share of the new house?

Do you know If a trustee does go ahead and sell the property and buys a smaller one do they, by law, have to inform the beneficiaries of the trust that they are selling and where the leftover money will be invested? Or can they just sell up and squirrel the money away without letting on to the beneficiaries that they’ve done this?

The surviving spouse is not normally the trustee. The ultimate beneficiaries are entitled to know what assets are held by the trust, both property and money. The trustees are not required to inform the beneficiaries automatically, but they must answer if the beneficiaries ask what assets the trust currently holds.

Also would the beneficiaries/trust also have a 50% share of the new house?

In the scenario described by @Another2Cats, the trust would indeed own a 50% share of the new house.

Do you know If a trustee does go ahead and sell the property and buys a smaller one do they, by law, have to inform the beneficiaries of the trust that they are selling and where the leftover money will be invested? Or can they just sell up and squirrel the money away without letting on to the beneficiaries that they’ve done this?
Also would the beneficiaries/trust also have a 50% share of the new house?

OK, there are two separate questions here so I'll answer them separately.

The first question is what information are the trustees required to give the beneficiaries.

Quite often, the beneficiaries and the trustees will be the same people. So, for example, the trustees may be the children of the deceased person and also the surviving spouse. In this situation there won't be a problem.

But, of course, this isn't always true and I'm guessing that this is the situation you're thinking about.

This sort of thing does happen and there have been court cases about it in the High Court.

Basically, the situation is that trustees can (generally speaking) do what they like with the assets of the trust, but the beneficiaries are entitled to know what the assets of the trust are if they request this information from the trustees.

They don't have to proactively inform you of any changes, so - yes - they can sell up and squirrel the money away without telling the beneficiaries. It is only if a beneficiary specifically asks for an account of the trust that they are required to do so.

So you, as a beneficiary, would need to write to them and ask for an account of the trust which gives you that information. If they do not provide that information then you should warn them that they could be personally liable for any legal costs.

At that point, you would likely want to get a solicitor involved if they still refused to provide the information.

There are a number of court cases on this, including:

RNLI v Headley [2016] EWHC 1948 (Ch)

In this case a person had died and left their estate in trust to certain charities (including the RNLI) but any income went to their children while they were alive. The executors (Mr Headley and another) were solicitors.

The charities asked for an account of the estate and kept asking for eight years. The solicitors never provided an account.

The charities were successful, and they were also awarded costs. The defendant solicitor was prohibited from paying those costs out of the estate but had to pay them himself because he:

"...in failing to account to the Claimants over so many years acted for a benefit other than that of the estate" [40]
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Another case is

Ball v Ball [2020] EWHC 1020 (Ch)

In this case, a man died and left his business in trust to this three children with the income going to his surviving wife.

Two of the children ran the business and the the third moved away and worked as an architect (side note, he was one of the founders of the Eden Project in Cornwall). The two children running the business didn't get on at all with the son who became an architect.

Even though the architect was also a trustee, he was able to bring a claim as a beneficiary against the other trustees.

He had asked for an accounting of the estate including what money had been paid out to his mother while she was alive and what money had been paid out to the trustees. His concern was that money had wrongly been paid out from the trust.

The court said:

[24] I accept [Counsel's] helpful summary of what is required from the trustees in providing an account to the beneficiaries:

i) They must say what the assets were;

ii) They must say what they have done with the assets;

iii) They must say what the assets now are;

iv) They must say what distributions have taken place.

[25] It hardly needs to be said that the level of detail the trustees must provide and the formality of the statements and documents will vary with the size and nature of the trust.
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Then there was Henchley v Thompson [2017] EWHC 225 (Ch) which said that trustees (and former trustees) may be ordered to account for a trust going back 25 years.
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Also would the beneficiaries/trust also have a 50% share of the new house?

That depends. There is no requirement for the trustees to invest in any new house (unless the will says otherwise). Generally, a will will say that the trustees may invest in a new house. That means that they are allowed to do it if they want to but are not required to.

So there are a wide range of different outcomes that are possible. Probably best explained by an example.

Suppose a surviving spouse lives in a property worth £400k and they own 50% and the trust also owns 50%.

The surviving spouse wishes to downsize to a house that costs £200k. The trustees could agree to go along with this and agree to purchase 50% of the new house. This is the example that I gave in my post above.

However, the trust may agree to use all of it's assets towards the purchase of the new home, none of the assets, or any amount inbetween.

So, at one extreme, the trustees may say that they are not prepared to put any money towards the purchase of the new house. If the surviving spouse wishes to downsize then they will need to take their share of the money from the sale of the house (£200k) and use that to buy a new home.

The surviving spouse now has a home that they own by themselves and the trust has £200k in cash. The trust must then invest that money as mentioned above.

Alternatively, the trust could buy the home for the surviving spouse with their £200k share of the original house. In that case, the surviving spouse would not own any part of the new house but would have £200k in cash to blow on a gigolo, fancy woman or favourite charity etc.

Or the split could be anything that the surviving spouse and the trustees agree on. It could be 75/25 or 60/40 or anything at all.

The surviving spouse is the only trustee as they had the company that was supposed to be the other trustee removed.

The beneficiaries do know what assets are held by the trust, 50% of a property.

My question was more can the surviving spouse sell up without informing the beneficiaries they’re going to sell and then not tell them where the extra leftover money, if downsizing, is invested.

Yes, if the surviving spouse is the only trustee they can sell without informing the beneficiaries and does not have to proactively inform them where the extra money is invested. However, if the beneficiaries ask what assets the trust holds, the trustee must tell them about the new property and where the extra money is invested.

Thank you @prh47bridge