Fundamentals of a Life Interest Trust

Thomson Snell & Passmore Life Interest Trusts

A Life Interest Trust is a form of Interest in Possession Trust.

This is a trust where there is an immediate entitlement to any income produced by the trust but no such absolute entitlement to the trust capital.

Life Interest Trusts in Wills

Most commonly, Life Interest Trusts are created in Wills where it is desired to give a guaranteed right to income during the lifetime of a beneficiary, for example to the surviving spouse, but no outright access to capital.

This is known as a life tenancy and is often used in the Wills of married couples who wish to ensure that the assets of the first to die pass intact to the next generation but the surviving widow(er) has the right to income. The right to income may also exist for a stated period of years only.

The income from Life Interest Trusts

The trustees of a Life Interest Trust should generally invest in assets that produce income which is either paid to the beneficiaries, or at least, can be clearly identified and ring fenced for the absolute benefit of the beneficiary entitled to income.

For tax purposes, trustees of a Life Interest Trust do not have to pay an additional charge on trust income i.e. the rate applicable to trusts. Where there is a beneficiary with a vested right to income the income will be assessed on that beneficiary, whether he actually receives that income or not (e.g. if it is reinvested by the trustees).

Many investment funds offer accumulation units. Under these, while the investor stills pays income tax on the income, it is not actually distributed.

Most OEIC (Open Ended Investment Company) and unit trust accumulation shares/units are structured on the basis that the income is re-invested in the fund and, rather than buying additional shares, it is reflected in the share price. As it is not possible to keep track of the future value of such reinvested distributions, this type of accumulation shares or units is not generally a suitable investment for a Life Interest Trust.


Links to more information

Important

This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.

Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.

If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.