What is a Flexible Life Interest Trust
The Flexible Life Interest Trust (FLIT) incorporates two separate Life Interest Trusts into a Will. The first holds the main residential property (or share), much like a PPT; the second captures the residue other than chattels (personal possessions). Effectively, the FLIT extends the protection and ring-fencing offered by the PPT to assets beyond the residential property.
The FLIT designates a life tenant, who has a lifetime interest in the property and the residue. This means that they have the right to live in the residential property, and to take any income that may arise from it or from the residue (i.e. from further rental properties or income producing investments). The life tenant never owns the assets in the trust absolutely. When the life interest ends – either because the life tenant has died or because they have agreed with the trustees to wind up the trust – then the assets pass absolutely to the remaindermen beneficiaries, who are named in the will.
In what circumstances would you advise a FLIT?
Disinheritance: if one spouse or partner dies and leaves their assets absolutely to the survivor, it is common for children of both or either party to become disinherited. This happens when the surviving partner remarries (an act which invalidates any outstanding will) and either neglects to create a new will or chooses to benefit their new family. This a particular concern for ‘blended’ families, where either or both partners have children from a previous relationship. However, it could affect any couple.
Care fee planning: Once a person dies and passes their assets on to a spouse or partner, those assets might latter be included in that person’s care fee assessment, should they require one. With a FLIT, however, the assets of the first to die are ring-fenced. While the survivor can enjoy these assets during their lifetime (remember they are a life tenant), the underlying capital should not be included in their assessment (though any income generated might be, as it arises).
Additional assets/properties: Where a client requires the same protection afforded by a PPT, but has additional assets (e.g. cash, investments, rental properties), then the FLIT is the likely a suitable option. This trust can ring-fence a client’s whole estate.
Key features of the FLIT
The FLIT provides a lifetime interest in the main residence or a share of the main residence and any other assets within the testator’s free estate (minus chattels) for the chosen life tenant.
The chattels pass as an absolute gift to the life tenant, minus any specific gifts that the testator wishes to make first. This is because it is unwise to let wasting assets such as furniture fall into a life interest trust.
The residuary trust contains the power to loan capital to the life tenant. This means that the life tenant, under agreement of the trustees, may receive cash from the estate to enjoy – but this will have to be paid back on their death. Trustees should take financial/legal advice before agreeing to any such loan.
At least two trustees are required. Careful thought should be made as to who may be the most appropriate as they will have to work harmoniously with each other and the life tenant. The life tenant can also be a trustee.
The FLIT can provide protection for the whole estate, which is useful for clients who have large amounts of investments, or more than one property, and who wish to protect these against the threats to wealth described above (disinheritance, care fees).
The life tenant never owns the property held in trust absolutely and has no rights to dispose of the property.
The property held in trust is guaranteed to pass to the ‘remaindermen’ beneficiaries, who are named in the will that created the life interest trust.
The FLIT provides powers for the life tenant, with the joint agreement of the trustees, to sell the property and buy another to be held under the same trust terms. This is useful as clients get older, as they may want to downsize. Any surplus cash from a sale and purchase will be held in trust until the death of the life tenant.
The life tenant is responsible for keeping the property in repair, keep it insured and pay all outgoings for it.
If the testator owns rental properties and these are placed into the residuary trust, the life tenant will receive the income produced by those rental properties after the death of the testator.
The life interest trust can be terminated before the death of the life tenant only with the agreement of the life tenant and the trustees. The trust funds would then be distributed to remaindermen beneficiaries.
Legal work will be required set the trust up and arrange the transfer on first death. This will incur extra costs.
In order to transfer assets into trustees’ name at the probate stage, there must be no outstanding mortgage or encumbrance on any property. Clients with an outstanding mortgage who wish to opt for FLIT planning should ensure that sufficient funds will be available to the estate to settle this liability on death (e.g. through life assurance).
Where a client has more than one property or a property and other assets of value within his/her estate and wishes for all of this value to be protected in respect of the above reasons.
Tax Treatment
Assets passing into a FLIT will be chargeable to IHT unless the Life Tenant is an exempt beneficiary, like a spouse. If the life tenant is not a spouse or civil partner, then IHT will be payable on the assets passing into trust on first death.
Any assets held in a FLIT will form part of the life tenant’s estate, for IHT purposes, when they die, as the trust creates an interest in possession. Be careful to note whether the trust fund aggregating with the survivor’s estate will cause their estate to exceed the available nil rate band(s).
Where the life tenant is not a spouse or civil partner, the two points above mean that tax may be paid on the property twice before it reaches the hands of the remaindermen: once on first death as assets pass into the FLIT and once on second death, when the trust assets aggregate with the survivor’s estate and pass to the remaindermen.
For married couples and civil partners, the FLIT is tax neutral from the perspective of the residence nil rate band (RNRB) provided that the remaindermen are lineal descendants of the life tenant.
For unmarried couples and cohabiting partners, the RNRB of one or even both partners may be lost, depending on the circumstances. If you have clients with taxable estates who fall into this category, please contact APS for more information.
Income generated by the trust (e.g. from rental of the property) will be taxed at the personal income tax rate of the life tenant
