Flexible Life Interest Trust

A Flexible Life Interest Trust (FLIT) arises when a beneficiary (usually a spouse) is left a lifetime interest in property (and often assets). This means that the beneficiary is entitled to receive income from the Trust, for life, but they are not entitled to receive capital as this will often pass to children from a previous or existing marriage. The beneficiary with the interest is called the Life Tenant or Primary Beneficiary. After the Life Tenant’s death, the assets in the Trust will pass to other beneficiaries (often the children), as identified in the Will.

A FLIT provides the Trustees with the power to pay trust income, and often trust capital to the Life Tenant. The Trust (written into the Will) may provide that the Life Tenant can live in a property owned by the Trust rent free and include powers for the Trustees to sell any such property and buy an alternative property for the Life Tenant to live in.

Where the life interest in the Trust begins immediately after the death of the person creating the Trust, it is called an Immediate Post-Death Interest in Possession Trust (IPDI).

A Flexible Life Interest Trust can provide legal protection for the Life Tenant against any other beneficiaries of the trust, and vice versa. A Statement of Wishes can also be used to inform your trustees as to how you wish the trust assets and income to be used and distributed. 

This type of Trust operates in a very similar way to a Discretionary Trust but has more flexibility.

When would you use a FLIT?

In a case where a Testator is married for the second time and has children from their first marriage, which is now becoming a common situation, the interests of their spouse and children can be protected by putting property for assets into a Flexible Life Interest Trust.

They are useful for clients who own a number of properties and can also be used to protect any vulnerable adults.

How does a FLIT work?

Upon first death, rather than passing assets directly to the survivor as would happen in a basic Will, this way, they go into a Trust. The Trustees (must be two – can often be the children if over 18), hold the assets and pay any income to the survivor for the rest of their life. The survivor has a life interest in assets and this can also be a right for them to occupy any property within the estate for their lifetime.

Trustees also have the power to rearrange any capital and income during the lifetime of the survivor, allowing for second death Inheritance Tax planning. As an example, this type of Trust would enable the Testator to gift his estate to his wife for her lifetime, meaning that she would be entitled to live in the property and receive any income from any investments etc, and then on second death the Trust will become a full Discretionary Trust for the children and descendants.

What are the advantages of using a FLIT?

Using a FLIT is a good way of controlling not only the Estate, but what then happens to that Estate upon second death and allows for the distribution of wealth through future generations in a way that the Trustees may consider best.

Another advantage with this type of Trust is that a surviving spouse is given more rights under it; they may have the right to receive the capital of a Trust and also the right to any Income.

A FLIT is also far less structured than other types of Trust and how it defines the rights of the Life Tenant. The Trust ultimately works alongside and is based around the use of a Letter of Wishes which sets out how the Trustees should exercise their powers.

What happens when the Life Tenant dies?

On the death of the Life Tenant, the FLIT will come to an end, however it will then change into a full Discretionary Trust and continue to be managed by the existing Trustees. The Trust should therefore be managed in the future and if not, it will be subject to exit and anniversary charges – The Planning Bee can give guidance on this. 

The Life Tenant should consider any tax issues that may arise upon their death and should put any plans in place for future tax mitigation – again, The Planning Bee can give guidance on this as we offer Inheritance Tax Planning advice.

Inheritance Tax

If the Life Tenant is a spouse or civil partner, there is no IHT when assets pass to the FLIT due to the spousal exemption. There are no IHT anniversary and exit charges during the life of the Life Tenant. When the Life Tenant dies the trust becomes a full Discretionary Trust and is taxed with reference to the relevant property regime so there may be anniversary and exit charges.

If the property is left to a FLIT the new residential nil rate band (RNRB) will not be available as on second death the property is passing to a Discretionary Trust for the children and not to the children absolutely.

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