Life Interest Trust - how does it work in practice?

[loonymoony]

My dad and stepmum currently have mirror wills but have talked about changing them to include a life interest trust for 33% each for me and my sibling, then the remaining 33% to my step-sibling.

Their house is currently worth approx 600k.

If my dad passes away first and they put the trusts in place, how does it work in practice? It's likely my stepmum would sell the house and move to something smaller, how does this impact on what we would each receive?

What if she outlives my dad for a long time?? What if she remarries or rewrites her will (I would not put it past my step-sibling to encourage this)? Stepmum is not very clued-up with money matters.

I don't mean this to sound entitled, just trying to understand how it all works

A life interest trust is a life interest for your step mum, not you. She has an 'interest' in the income (usually) for her lifetime. It then passes as pesribed when she dies.

Usually your step mum could move, but the capital from the sale is not hers, it belongs to the trust and so it could be invested for income (for example), but she can't just spend it.

The Trustees are the legal owners of the Trust assets and THEY authorise the move and THEY sell the house. This is of course assuming that the house is owned by your dad in his name and could pass into the trust. If it's jointly owned and not tenants in common, that can't happen anyway as joints owned assets can't be bequeathed.

The usual form is to split the assets to tenants in common Each party sets up a trust, with guidance to trustees, 1st death passes their assets to the trust, and the surviving party keeps their half (so could rewrite wills), but the trust and trustees own the half for the dead spouse. Trustees allow the surviving spouse to have access and use of the assets until they die, at which point they pass to the appointed people.

Sounds to me like a typical step child arrangement. Who would be the trustees?

So say the house is sold for £600k (they own it outright) and she buys a smaller place for £300k, then she dies 20 years later and the smaller place is worth £450k... am I right in thinking the £300k left over from the sale of the house is frozen in a trust between the three of us (my, my sibling and step-sibling) then then sale of the smaller place is then also split between the three of us too?

Can the entire house go into trust? Or just dad's half? Does it have to be 50/50 or can it 66/33?

I would hazard a guess that the three of us would be trustees. But I suspect they are joint tenants.

I am concerned step-sibling will get stepmum to rewrite her will if my dad dies first.

The money isn't 'frozen' in a Trust, it's invested to generate income that she's entitled to! You can't put a joint asset in a Trust though so his half can only go in if they separate the asset.

Ok is there another way of ring fencing assets?

Your step mum would be free to write another will but the money in trust would surely have to be ring fenced?

My grandfather had s trust similar to what you are describing he died and nothing happened until his wife died some 6 years later - I have no idea what her will stated but half was already in trust and then could be released

I think the point of the trust is to protect the money and allow your SM to gave somewhere to live. She can't then after you dad has dies alter that trust without a lot of fuss.

It's a pretty common situation and there's a lot on line about it.

we looked at doing this but decided we didn't want to put DHs kids in the position if waiting till I dies before getting their share of his house.

So I have two years to sell up or buy his kids out in a predetermined share if he dies first. I don't have kids which makes this easier.

I think you need to google this a bit more, or so you understand it, go and see a solicitor. It's a very common situation. You can protect your dads half, but her half she is free to do what she wants with, including leave it exclusively to her child. In reality that is often how wills and trusts are set up.

Ok thank you all. I think I understand just getting some of the terminology muddled.

If they split the assets and become tenants in common, is everything split 50/50 or can they choose a 66/33 split?

My understanding is that the tenants in common split can be anything, so 66/33% split is fine.

This would seem a sensible way to do it. Then your dad leaves his 66% to you and your sibling, with a lifetime interest for SM. Your SM leaves her 33% to her child, with lifetime interest for your dad.

Although your SM might not be happy with 33% of assets in her name rather than 50%.

My dad will deffo go first . I guess stepmum could have another 20+ years. She is currently happy with the wills splitting everything 3 ways. I trust her but not step-sib who I suspect will encourage stepmum to leave me and my sibling high and dry.

It's complicated and I'd prefer not to go into more detail than I have but the whole thing is making me feel uneasy. My dad will be devasted if all he's worked for will be lost. If I'm honest I'm surprised he hasn't already done this as he's quite savvy about financial stuff. Are there disadvantages (tax?) to this life interest trust?