Life interest trust Wills: a guide

See also: Can I give my house to my children to avoid care home fees?

Life interest trust Wills

Typically, our Will directs that when we die, upon completing the probate and administration process, our property, money, and possessions should pass immediately to the final beneficiaries.

But sometimes, there’s a good reason to delay a gift, instead granting a life interest in an asset – most often your home – to an intermediate beneficiary before it passes to the final beneficiary. Doing so creates a life interest trust in favour of the intermediate beneficiary.

Why create a life interest trust?

There are various reasons why you might consider creating a life interest trust. However, the two most common reasons are:

• considerations relating to second marriages/stepchildren (sometimes referred to as ‘sideways disinheritance’); and
• mitigating exposure to future care home fees.

Sideways disinheritance

It’s not uncommon in a marriage for one or both spouses to have children from a previous relationship. In that scenario, it’s understandable if each spouse wishes to ensure that should they die first, their share of the marital home will eventually pass to their own children. At the same time, they will also want to ensure that their spouse has the right to continue living in the property for life. A simple understanding between you that the survivor will ‘do the right thing’ is not binding.

A property life interest trust Will provides certainty that your share of your home passes to your chosen beneficiaries. Those are usually your children or grandchildren. Your surviving spouse cannot undo the arrangement, although they have the right to use and enjoy the property for life.

Putting house in trust to avoid care home fees

First, there’s a common misconception that if both spouses are alive and one requires residential care, your home is vulnerable to meet care home fees. However, where one spouse still lives in the marital home, it’s disregarded in the financial means assessment.

The risk arises if – as is very common – each spouse has left their entire estate to the other, and the survivor subsequently requires residential care. In that case, all their assets, including those inherited from you, are considered in the financial means assessment.

From October 2023, the upper capital limit, i.e. the point at which the person requiring residential care becomes eligible to receive some local authority financial support, rises from £23,250 to £100,000. But in many cases, that still exposes a significant proportion of your assets, including your home.

If you die first, a property life interest trust Will ringfences your share of your home from your spouse’s future financial means assessment. That’s because you leave your share of the property to a trust, not your spouse. Until your spouse requires residential care, they can continue living in the property. They can even move home, subject to certain conditions, with the life interest ported to the new property.

Care home fees cap

In tandem with the increase in the upper capital limit, the government has introduced a new “£86,000 cap on the amount anyone in England will need to spend on their personal care over their lifetime.” It’s easy to misinterpret this as a cap on all care home fees. But, even when you reach the cap, you remain responsible for ‘hotel costs’, i.e. the significant board and lodging element of the fees, as well as any amount over and above what the local authority considers you should be paying. By some estimates, on reaching the cap, you may still be responsible for around £20,000 a year.