A Flexible Life Interest Trust is very useful for blended families, where the testator is concerned about their partner leaving assets to future children or step-children after their death. It can also be used to potentially reduce inheritance tax.
As it is New Year and we all need cheering up – here is a fairy story to illustrate my point:
Snow White’s father (Mr White?) realises he made a mistake by marrying his second wife. He wants her to be comfortable after his death, but does not want her to inherit his £5million estate.
In his Will, he places all of his assets into a Flexible Life Interest Trust backed up by a letter of wishes. This means that, after his death:
- The trustees can give both capital and income out of the fund to his wife during her lifetime. In practice it is usually just the income that is given, with the capital being protected for the default beneficiaries.
- However, the trustees know from the letter of wishes that the testator wanted most of his estate to go to his daughters. They can give money to Snow White and her sister during their stepmother’s lifetime.
- HMRC cannot claim any anniversary or exit charges on the Trust fund during the lifetime of the wicked stepmother.
- When she dies, the trust assets fall into her estate for Inheritance Tax purposes. However, the Trustees can give away enough money to the children during her lifetime to ensure that, at this point, the fund is below the nil rate band for inheritance tax (currently £325,000).
- When the wife dies, the Trustees can decide to end the Trust and give all the assets to Snow White and her sister absolutely.
This Trust is very flexible, as it allows the trustees to adopt a “wait and see” approach and use the assets as needed by the surviving spouse and children as the years pass.
This Trust is called an Immediate Post Death Interest or IPDI Trust. Another example of an IPDI Trust is the Protective Property Trust (PPT) which I mentioned in an earlier blog. However, there are 3 key differences between the 2 trusts:
- The PPT protects only some or all of the value of the family home, whereas any assets can be placed into the FLIT – including property, shares and investments.
- The PPT does not allow the surviving partner to receive trust income during their lifetime – it protects the whole value for the default beneficiaries. In the FLIT, the trustees can use their discretion to give capital or income from the fund to the surviving partner during their lifetime.
- In a FLIT, the trust assets can total more than the nil rate band for inheritance tax during the lifetime of the surviving spouse without incurring anniversary and exit charges. Charges will only be incurred on the death of the surviving spouse. With a Protective Property Trust, the trust assets must remain below the nil rate band for the whole of the trust period.
If you would like to find out more details about the FLIT you can download the Flexible Life Interest Trust Fact Sheet.
If you think that a Trust might be the right option for you, why not contact me, Amanda Harris, Your Local Will Writer. You can find out what my clients have said about my work on my website www.alhlegal-willwriters.co.uk/testimonials or get in touch by phone 0115 8780417 or email at email@example.com
Please get in touch if you have any further questions about Trusts.