Life interest trust
A life interest trust gives one person (the life tenant) the right to income from trust assets, or to live in a property, for their lifetime — after which the capital passes to different beneficiaries (the remaindermen).
A life interest trust — also called an interest in possession trust — gives one person, the life tenant, the right to income from the trust assets or to occupy a property for their lifetime. When the life interest ends, the capital passes to different beneficiaries, the remaindermen.
The life tenant gets the use. Somebody else gets the asset.
The classic use#
A second marriage. A husband wants his wife to live in the house for the rest of her life, but wants the house itself to go to his children from his first marriage.
Leaving it to her outright means she can leave it to whomever she chooses — including her own children, or a future spouse. Leaving it to his children outright means she could be asked to move out.
A life interest trust does both: she lives there for life; on her death it passes to his children as he intended.
How it differs from a discretionary trust#
| Life interest trust | Discretionary trust | |
|---|---|---|
| Entitlement | Life tenant has a fixed right to income or occupation | Nobody has a fixed entitlement |
| Trustee discretion | Limited | Wide |
| IHT treatment | Immediate post-death interest in a will is treated as the life tenant's for IHT | Relevant property regime — periodic and exit charges |
| Flexibility | Low | High |
Points to watch#
Who pays for repairs, insurance and buildings maintenance needs stating explicitly. So does whether the life tenant can move — a trust that traps a widow in a four-bedroom house she cannot manage has failed at the thing it was for. Well-drafted life interest trusts include a power to substitute the property.
On the life tenant's death the trust assets are generally treated as part of their estate for inheritance tax, which surprises families who assumed the trust removed them from it.
Related#
Property protection trust · Discretionary trust · Severance of joint tenancy · Trust drafting software
Related terms
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Discretionary trust
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