Complex families often come with complex requirements to meet their long-term goals, and matters can be made more difficult when each testator has separate goals or concerns in mind. These goals usually revolve around the inheritance the children are to ultimately receive and when they receive it, and in certain cases, if they inherit at all. Using a Life Interest of the Residuary Estate can cater for most family needs for a number of reasons;
- The surviving spouse will be the Life Tenant on the first death. They will be entitled to all income generated by the trust, and the trust can allow them access to the use of capital at the Trustees’ discretion if desired;
- All Life Interest Trusts allow the use of the Transferrable Nil-Rate Band (TNRB) between spouses;
- Each testator can appoint separate beneficiaries from each other;
- If the Trustees are given the power to advance capital, it enables second-death Inheritance Tax planning;
- The assets held by the Trusts are protected from third parties, including future spouses.
There are two variations of life interests available over the Residuary Estate, each having its own advantages over the other. These are a simple Life Interest over the Residue, which we refer to as an IPDI (Immediate Post Death Interest) or the FLIT (Flexible Life Interest Trust). As well as the advantages above, the IPDI offers the following;
- The executors can claim the Residence Nil-Rate Band (RNRB) on the second death, providing the main residence forms part of the Trust, and the ultimate beneficiaries are classified as direct descendants by HMRC to the surviving spouse;
- Power to advance or Loan capital is optional;
- The ultimate beneficiaries will inherit absolutely on the second death.
However, the IPDI cannot offer second death protection if the family has untrustworthy beneficiaries. Therefore, the clients may need to consider a FLIT. As well as the advantages previously stated, the FLIT offers;
- Power to advance capital as standard. This can be advanced to the surviving spouse or the Discretionary Beneficiaries as Potentially Exempt Transfers;
- The Trust continues as a Discretionary Trust following the death of the Life Tenant, which offers protection for the Discretionary Beneficiaries;
The FLIT itself does not enable the executors to claim the RNRB on the second death if the main residence forms part of the Trust. For the purpose of this article, the term spouse also includes civil partners.
