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What is a Flexible Life Interest Trusts? (FLITs): The Ideal Modern Family Trust

In this blog, I’d like to highlight the benefits of and answer the question "what is a Flexible Life Interest Trust", often dubbed the “ideal modern family trust.” We've discussed similar arrangements in previous blogs about Protected Property Trusts, but this one is more advanced and offers greater benefits if you have a more diverse estate other than your main residence, for example additional property, investments or substantial savings.

a passing of the torch symbolising transfer of wealth

Including a Flexible Life Interest Trust in your will offers a unique blend of immediate benefit and long-term asset protection for the proverbial passing of the torch from you to your chosen beneficiaries. Upon your passing, a Flexible Life Interest Trust allows a specific beneficiary, usually a surviving spouse, to benefit immediately while safeguarding the assets for future beneficiaries, such as children.


In a Flexible Life Interest Trust, the beneficiary is granted a life interest in the estate's assets. Trustees have the authority to distribute income and sometimes capital to this life tenant. While the life tenant is alive, the trust functions as an interest in possession trust. This means the beneficiary can benefit from the income or use of trust assets during their lifetime while preserving the capital for future beneficiaries. Upon the life tenant's passing, the trust seamlessly transitions into a discretionary trust (read this blog to learn more about discretionary trusts).


This flexibility makes Flexible Life Interest Trusts particularly advantageous for those who wish to ensure their surviving spouse is well-provided for during their lifetime while also protecting the trust assets for other beneficiaries from various modern threats such as sideways disinheritance due to a second marriage, divorce from a second marriage, bankruptcy, legal troubles and care fees. This modern approach offers peace of mind and robust financial planning for the future.


How does a Flexible Life Interest Trust work?

a man placing his home in trust

When you pass away, the remaining assets of the estate are placed into a trust. The life tenant, usually the surviving spouse, will receive all the income generated by the trust during their lifetime and is considered the primary beneficiary. Trustees have discretion over the capital and can choose to either give it outright or loan it to the life tenant.


This flexibility extends to other beneficiaries as well. For instance, trustees might decide to use some of the trust funds to help pay off a child's mortgage, cover university expenses, or even help them start a business.


Given the versatile nature of this trust, it's a good idea to spell out any specific wishes or concerns in a well-drafted letter of wishes. This will guide the trustees in distributing the trust funds according to your intentions.


What are the advantages of a Flexible Life Interest Trust

a woman in a care home who just had to sell her house to pay for it

A Flexible Life Interest Trust offers several advantages that make it an ideal choice for estate planning. Firstly, it protects the estate's assets after the first death and continues to do so after the second death, as the trust then becomes a discretionary trust, benefiting future generations.


It safeguards the estate if the surviving spouse requires care or faces bankruptcy, as the assets are owned by the trust and not the individual. This protection also prevents assets from being transferred to a new spouse through gifting, divorce proceedings, or inheritance.


Additionally, the trust shields the assets for other beneficiaries from third-party claims, as the assets remain within the trust. For beneficiaries concerned about inheritance tax (IHT), trustees can loan money to them, ensuring it doesn’t increase their personal estate size. There are no anniversary or exit charges during the life tenant’s lifetime, allowing them to make gifts to reduce IHT liabilities.


Moreover, Flexible Life Interest Trusts provide flexibility for trustees to adapt the trust in response to changes in IHT laws. They can convert the trust fund into another type of trust or even terminate the trust early and distribute the assets to the beneficiaries. This adaptability ensures that the trust can meet the evolving needs and circumstances of the beneficiaries.


Are there any disadvantages of a Flexible Life Interest Trust?


One notable disadvantage of a Flexible Life Interest Trust is the potential future inheritance tax (IHT) liability it creates. The assets within the Flexible Life Interest Trust are considered part of the life tenant's estate for IHT purposes, which could lead to higher tax obligations.


When a main residence is left to a Flexible Life Interest Trust, the Residence Nil Rate Band (RNRB) will not be applicable. This is because, upon the second death, the assets transfer to a discretionary trust rather than passing directly to descendants.

Bear in mind, if your estate value exceeds a certain threshold, you don’t get the RNRB anyway, making this a viable option for high net-worth individuals. There are also ways to get back some of the RNRB through the 2 year read back rules.

Therefore, it's imperative to seek proper advice if this is important to you. You need to decide what concerns you more: the extra tax or the risk of losing the asset to the aforementioned modern threats.

If you're reading this and want help to manage an existing FLIT reach out to me.


How are Flexible Life Interest Trusts taxed?


For inheritance tax (IHT) purposes, the life tenant of a Flexible Life Interest Trust is treated as inheriting the trust assets upon your death. If the life tenant is your spouse or civil partner, the spousal exemption applies, meaning no IHT is due when everything transfers to the Flexible Life Interest Trust. As a result, the Nil Rate Band (NRB) is preserved and can be transferred to your spouse for use upon their death.


During the life tenant's lifetime, no anniversary or exit charges apply. Also, the trustees and life tenant can make gifts from the trust to other beneficiaries to reduce IHT liability. These gifts are considered Potentially Exempt Transfers (PETs), subject to the seven-year rule, which means they will not be part of the life tenant’s estate for IHT purposes if the life tenant survives for seven years after the gift.


Upon the death of the life tenant, the trust transitions into a discretionary trust and is then taxed under the relevant property regime, which means that anniversary and exit charges may apply.


Flexible Life Interest Trusts offer a sophisticated and adaptable approach to estate planning, ensuring both immediate benefits and long-term protection for your loved ones. By combining the security of asset preservation with the flexibility to adapt to changing circumstances, Flexible Life Interest Trusts provide peace of mind and robust financial planning for the future.


If you’re considering how best to secure your estate and provide for your family, now is the perfect time to explore the benefits of a Flexible Life Interest Trust. Joshua from Astute Wills is here to help you navigate these options and tailor a plan that suits your unique needs and wishes.


Book a consultation with Joshua Young today, and take the first step towards ensuring a secure and prosperous future for your family. Let Astute Wills guide you in making informed decisions that will stand the test of time. Your legacy is my priority.

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