Life Interest Trust: How to keep your property in the right hands after death

2 August, 2018 5 minutes reading time

Most of us want to ensure our property goes to the right people after we die. This becomes especially important if you are in a second marriage or if your children do not get along.

The Risk of a Standard Will

A standard Will usually leaves your entire estate to your surviving partner. After they pass away, the estate typically passes to your children.

However, there is a catch. Under a standard Will, there is no guarantee your children will receive anything. For instance, your surviving partner could remarry, rewrite their Will, or run out of funds. As a result, your children could be left with nothing.

Fortunately, a Life Interest Trust offers a safe way to protect your assets. This legal setup gives you the power to name exactly who owns the rights to your property after you die. Consequently, your family home and assets remain protected, regardless of what happens in the future.

To explain how a Life Interest Trust works in practice, let’s look at a hypothetical married couple, John and Mary.

What’s the situation, and how will Life Interest Trust help?

John and Mary are a married couple with two children. Currently, their Wills provide that when one spouse dies, the survivor inherits everything. After the surviving spouse passes away, the children will inherit the estate equally.

The Problem: Remarriage

It is common for people to remarry after a partner’s death. In our example, John passes away first, and Mary later remarries a man named Chris.

If Mary does not update her Will after marrying Chris, a major legal issue arises. By law, marriage typically revokes an existing Will. Therefore, when Mary dies, her entire estate—including everything she inherited from John—will automatically pass to her new husband, Chris. As a result, John and Mary’s children could receive nothing.

Further Complications

Even if Mary tries to manage things with a new Will, family dynamics can become complicated:

• Favouritism: If one of the children was from John’s previous relationship, Mary might change her Will to leave everything to her own biological child only. 
• Disinheritance: Alternatively, Chris could inherit everything upon Mary’s death. He could then amend his Will to leave the entire estate to his own family, completely excluding John and Mary’s children.

The Solution

When planning for the future, John needs to protect his assets against these unpredictable changes. This risk is precisely why John and Mary should seriously consider a Life Interest Trust.

How can a Life Interest Trust protect my estate?

You don’t want to find yourself facing the complications mentioned above. If you want to avoid the issues John could face with his estate, you could arrange for the estate of the first to die to be left in a Trust. This is known as a Life Interest Trust and would give the survivor the following rights:

1. Gain an income from the deceased’s invested estate. For example, off rent, dividends, interest and the like;
2. Live rent-free in the property owned by the deceased.

Under this arrangement, the Will of the first to die would specify how the Trust fund should be inherited following the death of the survivor.

This agreement allows the surviving partner to benefit from the deceased’s estate while also protecting the future interests of any children or other family members.

How a Life Interest Trust Works in Practice

A couple’s home is usually their biggest asset, which means it often causes the most complications after a death. Because of this, property is the most common asset placed into a trust.

Let’s look at another example to see how this works.

The Scenario: Jane and Michael

Jane and Michael are married, and both have been married before. They each have children from their previous relationships. Together, they own a house, and they also have individual savings.

To protect everyone, they set up Wills that include a Life Interest Trust for the house. Their savings, meanwhile, go directly to the surviving spouse.

Step-by-Step: The Trust in Action

Here is how the trust protects both the surviving partner and the children:

• Protecting the Children: The trust provides that, upon the death of Jane or Michael, their individual share of the house is set aside for their children. The surviving partner cannot change this.
• Protecting the Surviving Partner: Although the children technically own the deceased partner’s share of the house, the surviving spouse has the right to live there rent-free for the rest of their life. However, they must pay the bills, insurance, and maintenance to keep the property in good condition.
• Flexibility to Move: If the surviving partner wants to downsize, the house can be sold. The proceeds from the deceased partner’s share can then be used to purchase a new property, which will remain subject to the same trust rules.
• Financial Freedom: Because the individual savings went straight to the surviving partner, they still have cash available to spend as they wish.

In this scenario, the Life Interest Trust provides total peace of mind. It guarantees that the surviving partner has a secure place to live while ensuring that the children receive their rightful inheritance—no matter what happens in the future.

Our Advice

Each relationship is different and will bring its own distinct set of challenges when it comes to protecting your estate for the future. However, in most cases, a Life Interest Trust is well worth considering, as it will give you the peace of mind that your loved ones will receive what you intend for them.

For further information, or to discuss your particular situation please contact us, we’re here to help.

Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.

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