Flexible Life Interest Trusts in Leicester
Expert legal advisors
The Flexible Life Interest Trust is ideal for high net worth clients and helps plan against IHT planning. This trust can be used to pass down generations and allows the trustees the flexibility to plan against IHT as well as provides an income or capital to the beneficiaries. This trust also helps against care costs, sideways inheritance and tax planning. All the assets will be severed into 50% each.
Benefits for the principal beneficiary
The principal beneficiary of the Life Tenant is entitled for income from the capitals of the trust. The trustees can pay the income to the Life Tenant and provide him or her with a free rent. The trustees can also sell any such rental property or buy an alternative property for the principal beneficiary. A Flexible Life Interest Trust also provides the Life Tenant with legal protection from other Life Tenants.
A scenario with Flexible Life Interest Trust
One of the scenarios is Mr passes away and his share goes into the trust. Mrs can gift all or part of her estate in her lifetime triggering the 7-year rule. She could borrow from Mr’s trust and that could lead to no tax payable. Each situation is different, so the planning around this will be different for all.
We also provide legal advice regarding Disability Trusts and Protective Property Trusts.
The Flexible Life Interest Trust Scenario
The current rules on Inheritance Tax (IHT) are great news for married couples because they allow the executors of the estate of a surviving spouse to claim an uplift in their IHT allowance of the percentage amount of the allowance of the first spouse to die that was not used by gifts to non exempt beneficiaries.
Well, say Jack died in 2006 – when the IHT allowance was £285,000 and he left his estate of £250,000 to his wife, Jill. Jill dies in late 2010 when the IHT allowance is £325,000 and, say, her estate is £500,000. Jill’s executors are able to claim a 100% uplift in Jill’s IHT allowance because on Jack’s death his IHT allowance was not used at all because he passed his estate to his wife who is a beneficiary exempt from paying IHT. So Jill’s IHT allowance is uplifted from £325,000 to £650,000 and her estate pays no IHT, even though her estate is above her IHT allowance.
So, married couples don’t need to make Wills then?
Well, as a Will Instruction taker, I could trot out no end of reasons why everyone should have a Will. From an IHT mitigation point of view married people need to ensure that on first death, their estate passes to the surviving spouse – a beneficiary exempt from IHT. This ensures that the survivor’s IHT allowance can be uplifted by the maximum amount. The only way this can happen is through a Will, because a surviving spouse does not have rights to take the entire estate under intestacy.
So, married couples can write straightforward Will’s leaving everything to each other?
Yes – and no. Again from a purely IHT mitigation point of view, under current legislation, a simple Will is an option. But what if IHT rules change again? What if the surviving spouse remarries? What if the surviving spouse goes into a care home? What if a new rule comes in which nobody has thought about to date?
So, can I have my cake – and eat it?
The good news is – yes. The solution is a trust created by a Will which is being dubbed “The Flexible Life Interest Trust” or FLIT.
This trust is created on the death of the first spouse and the capital assets of the deceased are held in a trust which pays any income generated to the surviving spouse for their lifetime. This is treated for IHT purposes as an outright gift to the surviving spouse, so does not create a tax charge and does not use any of the IHT allowance of the deceased spouse – preserving it for later use on the death of the surviving spouse. On the death of the surviving spouse the trust capital is passed to nominated beneficiaries, such as children. Because the capital in the trust is not owned by the surviving spouse, it cannot be given away by them to, say, a new husband or wife, and it cannot be assessed if the surviving spouse needs to end their days in a care home.
Includes powers for the trustees to lend trust capital to the surviving spouse.
So if they need capital, the trustees can lend it to them – with the capital being repaid either when the surviving spouse dies, or if they go into care.
Includes powers for the trustees to give capital to the surviving spouse. It is unlikely that this power would be used because the capital would then be owned by the surviving spouse and could be given by them to a new husband or wife and would be assessed if they went into care. However, we are trying to create a flexible trust to cover eventualities both foreseeable and unforeseeable – and this power, for example, enables the trust to be wound up and the whole estate given outright to the surviving spouse.
Includes powers to pay capital to the nominated beneficiaries (children, for example) so that if children need capital and the surviving spouse does not (for example if the surviving spouse is in a care home and the children are in need of capital to reduce their mortgages), capital in the trust could be paid to them.
Included powers for the trustees to convert some or all of the trust into another type of trust. So if, for example, IHT laws change and make it preferable for the trust capital to sit in, say, a Nil Rate Band Discretionary Trust, the trustees could do this.
If this FLIT is so good should I have always had one in my current Will?
The fact that a FLIT can be converted into any type of trust, including an IHT saving Nil Rate Band Discretionary Trust has led to a number of clients who had tax problems questioning why a FLIT was not recommended to them before. And I have to admit that they have a good point. However it should be remembered that the work to convert a FLIT into a Discretionary Trust, for example, would be greater than the work to set up a Discretionary Trust created in a will. In cases where it is (or was) known that a Nil Rate Band Discretionary Trust is (or was) definitely beneficial to save IHT, I still believe that it is (or was) the best advice.
Is this the ideal modern Will !
Modern life is complex and family life can be particularly complex.
As a practitioner in my professional practice, the ideal solution for any new Will or Trust is to prepare a document which meets the requirements of the testator or settler who are leaving their assets under the Will or Trust whilst also giving as much flexibility as possible within the documents to adjust for future changes of law and circumstance.
It is with this thought in mind, that I propose what I would call “the flexible life interest with remainder to discretionary trust Will” (quite a mouthful) as the ideal modern Will for many married couples and civil partners.
The main advantages of this type of Will can be summarised as follows:-
1. The flexible life interest Will Trust which will be created in favour of the surviving spouse or partner will still benefit from the new transferable IHT nil-rate band notwithstanding the recent changes to the tax treatment of trusts.
2. The flexible life interest Trust is flexible because it allows the Trustees to grant capital as well as income to the surviving spouse or partner, if required.
3. The creation of the life interest Trust should protect the testator’s capital assets from any claims made against it by a local Council or other authority if the surviving spouse or partner needs to go into long-term nursing care.
4. The life interest Trust also creates a situation which is sometimes known as the “21st Century chastity belt”. In other words the testator’s capital can be protected so that it eventually falls into the name of the testator’s children or other named beneficiaries rather than potentially into the pockets of a new spouse or partner.
5. Once the life interest Trust is terminated, the benefits of a discretionary trust arise which again give a good deal of flexibility to the surviving children or other named beneficiaries who can all potentially benefit from the discretionary Trust as named beneficiaries and are also likely to maintain control of the Trust as named beneficiaries.
The main benefits in this regard are as follows:-
a. If any of the children as potential beneficiaries of the discretionary Trust are subject to matrimonial or insolvency proceedings, their interest as potential beneficiaries of the discretionary Trust means that the funds are protected from ex-spouses and creditors of the potential beneficiaries.
b. In some circumstances, the surviving children may already have assets of their own which already exceed the nil-rate band available to them. In these circumstances, the right to loan monies or take occasional benefits from the discretionary Trust is a particularly tax-efficient means of utilising the Trust.
c. Of course, there maybe occasions when the potential beneficiaries simply wish to receive the capital from the Trust and subject to their consent the Trustees will have the relevant powers to simply appoint capital to the relevant beneficiaries and close the Trust, if applicable.