Life interest trusts can be used for a variety of purposes, particularly where it is intended to create different beneficial interests in capital and income. Traditionally, they have often been established where there has been an immediate need to provide income to support one or more beneficiaries but also an intention to eventually transfer the trust capital to another beneficiary, or group of beneficiaries.

Key Features

• In a life interest trust, one or more beneficiaries (the "life tenant(s)") are entitled to the entirety of the trust income on an arising basis. The life tenants are said to hold "life interests" in the trust. This means the trustees do not have any discretion to accumulate or retain income. This contrasts with the workings of discretionary trusts, under which the trustees can accumulate income.
• Within the terms of the above definition (and subject to the terms of individual trusts) there is scope for considerable flexibility. For example, there is no requirement for the life interests to be equal in circumstances where there is more than one life tenant. Provision can also be made for successive interests (eg for A to become a life tenant on the decease of B). The settlor can be a (or the only) life tenant.
• The life tenants are not necessarily also beneficiaries of trust capital. Subject to the terms of individual trusts, if the life tenants do have beneficial interests in capital, such interests do not have to be in proportion to their life interests and may be subject to the exercise of the trustees' discretion.
• Life interest trusts can be used for a variety of purposes, particularly where it is intended to create different beneficial interests in capital and income. Traditionally, they have often been established where there has been an immediate need to provide income to support one or more beneficiaries but also an intention to eventually transfer the trust capital to another beneficiary, or group of beneficiaries. For example, a life interest trust might provide income for an elderly relative of the settlor during that relative's lifetime, with the capital being destined for the settlor's children or grandchildren.
• Life interest trusts may be treated differently from discretionary trusts for tax purposes. For example, in circumstances where UK inheritance tax would apply, these different types of trust are subject to different tax regimes. In this context, it is also important to remember that "income" for trust purposes is not necessarily the same as "income" for tax purposes.

 If you would like to discuss Life Interest Trusts please speak to Andrew, Ben or Stacy on our Wealth Management Team.