A Life Interest Trust (LIT), also known as an Interest in Possession Trust, is a document that names one or more beneficiaries to an estate and their entitlement to an income from assets held in trust over their life time.
This person is known as the Life Tenant. If that asset is a house or property, then the
Life Tenant is entitled to either the rental income on the property, if it is rented out, or to live in the property if they wish to.
However, a Life Tenant is not entitled to receive any of the remaining capital from the Trust. The Trust can also name other beneficiaries who are entitled to the assets in the Trust once the Life Tenant has died. They are known as Residuary Beneficiaries or Remainder men. However, while the Life Tenant is alive they do not receive anything
from the Trust unless the Life Tenant agrees to a distribution of the assets. LITs are designed to protect the children of a marriage or Civil Partnership in the event
that one partner dies and the other remarries.
You can also make specific requests or instructions on a Life Interest Trust. As a Trust is overseen by Trustees, you can give them specific instructions as to how you
would like the Trust to be managed. For example:
You can give the Trustees the power to either give or lend capital from the estate to
the Life Tenant at their discretion. Where a property is involved, you can specify
that if the Life Tenant wants to vacate the property they can then direct the Trustees to
sell that property and buy another for the Life Tenant to occupy and you can give
specific instructions as to how you would like any capital in the Trust to be invested.
Taxation A Life Tenant is treated as owning all of the assets held in Trust. Any income (such as rent) from the Trust belongs to the Life Tenant and is therefore taxed according to the beneficiary’s personal income tax rate.
No additional income tax is paid by the Trust. One major advantage of the LIT is that it protects the assets in the Trust from being used up during the lifetime of the Life
Tenant. So if a Life Tenant goes into full time nursing care, the local authority cannot take the assets in the Trust to pay for the care of the Life Tenant.
A Life Interest Trust is particularly useful if a couple have children and want to make sure that they benefit from the estate of either partner.
This can be contrasted with a trust which simply gives a right to reside in the property.
A trust of this nature does not give the occupant a right to income from the trust and is not therefore taxed as an income in possession trust.
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