Flexible Life Interest Trust

If you have significant assets or investments as well as property, the Flexible Life Interest Trust (FLIT) can provide you with the peace of mind that your surviving spouse or civil partner will have an income for the duration of their lifetime. The income can help to pay rent and avoid care costs, sideways inheritance, and tax planning.

How does it work?

The FLIT or flexible life interest trust is included in a will but only becomes effective on the death of the first partner. The capital assets of each partner are severed into 50% and held in the trust. The surviving partner (or ‘life tenant’) can then benefit from loans and income from the chosen trustees.

Power of the trustees

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The trustees can lend money to the life tenant, with the capital being repaid either when the surviving spouse dies or if they go into care.

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They can also ensure that the life tenant lives in a property owned by the trust rent-free, and they can sell any such property and buy an alternative property for the tenant to live in.

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The trustees can also pay the nominated beneficiaries (children, for example) before the death of the surviving spouse. Therefore, if children need capital and the surviving spouse does not (for example, if the surviving spouse is in a care home and the children need to reduce their mortgages), they can be paid with capital from the trust.

Inheritance Tax (IHT)

Many people set up this trust for inheritance tax purposes. As the income distributed to the life partner is treated as an outright gift, it does not create a tax charge, nor does it use any of the IHT allowance of the deceased spouse. Instead, it is preserved for later use on the death of the surviving spouse, where the trust capital is passed to chosen beneficiaries, such as children. As the capital in the trust is not owned by the surviving spouse, the funds cannot be left to a new partner, and they cannot be assessed should the surviving spouse require long-term nursing care in the future.

The current rules on Inheritance Tax (IHT) are beneficial for married couples. Why? Because the estate executors of the surviving spouse can claim an uplift in their IHT allowance (of the percentage of the allowance of the first spouse) that was not used by gifts to non-exempt beneficiaries.

Let’s look at an example:

Mr Smith died in 2006 – when the IHT allowance was £285,000, and he left his estate of £250,000 to his wife, Mrs Smith. She passed away in late 2010 when the IHT allowance was £325,000, and her estate was £500,000. Her executors can claim a 100% uplift in her IHT allowance because, on her partner’s death, his IHT allowance was left unused (as he passed his estate to his wife, who is a beneficiary exempt from paying IHT). So Mrs Smith’s IHT allowance is uplifted from £325,000 to £650,000, and her estate pays no IHT, even though it is above her IHT allowance

On the death of the surviving partner, the Life Interest Trust terminates, and the benefits of a Discretionary Trust arise.

This trust offers flexibility to the surviving children or other named beneficiaries, who are also likely to maintain control of the trust. It also offers additional benefits:

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    If any 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.

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    In some circumstances, the surviving children may already have assets that 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.

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    Of course, there may be occasions when the potential beneficiaries 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.

    Is a simple will not enough?

    Our team of experts at Paradigm Wills and Legal Services cannot stress enough the need for a basic will. From the perspective of IHT mitigation, 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. A will is the only option allowing a surviving spouse to take the entire estate. However, it may not be enough. What happens if IHT rules change again? What if the surviving spouse remarries or goes into a care home? To avoid these risks, we would propose ‘A Flexible Life Interest with Remainder to Discretionary Trust Will’ as the ideal modern will for many married couples and civil partners.

    Can you convert a FLIT into another type of trust?

    If required, most a flexible life interest trust can be converted into different types of trusts, including an IHT-saving Nil Rate Band Discretionary Trust. For example, if your circumstances change or IHT laws change, the life tenant’s entitlement may be reduced if they remarry or get a new civil partner. Your trustees can also have discretion over this.

    An inheritance tax specialist can provide tailored advice to help you navigate the complexities of inheritance tax. They can assist in structuring your will, setting up trusts, and making lifetime gifts to reduce the taxable value of your estate. Their expertise ensures that you make the most of available exemptions and reliefs, ultimately protecting more of your wealth for your beneficiaries.

    With our continued support, we free you from the burden of worry and provide you with peace of mind that your assets will be inherited by your loved ones when you are no longer here.

    At Paradigm Wills and Legal Services, we genuinely care about educating people on the importance of making a lasting power of attorney in Leicester. In an industry often loaded with complex legal jargon and a conveyor-belt mentality, we provide a paradigm shift in how we offer our wills services. We aim to supply fresh ideas, clear and straightforward explanations, and a service tailored specifically to you. With you at the centre, we strive to make the will writing process as transparent as possible.

    Contacting us is free. Have a consultation or a home visit with one of our experts and discuss your options with no obligation.

    Our team of seasoned legal advisors is always available to offer comprehensive support and expert advice. Whether you're looking to draft a will, establish a trust, navigate the complexities of applying for probate, or arrange for prepaid funeral plans, we've got you covered. Our goal is to simplify these processes for you, ensuring clarity and peace of mind every step of the way.

     

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