Flexible Life Interest Trusts (FLITs) are frequently described as the “ideal modern family trust.”
They offer a sophisticated solution for individuals who wish to provide immediate financial security for a loved one while ensuring long-term protection for the next generation.
What is a Flexible Life Interest Trust?
A FLIT is established when a beneficiary, typically a surviving spouse or civil partner, is given a life interest in the assets of an estate.
During the life tenant’s lifetime, the trust is treated as an interest in possession trust.
However, upon the death of the life tenant, the trust automatically converts into a discretionary trust (a relevant property trust).
This unique dual-stage structure allows for maximum flexibility over a period of up to 125 years.
How Does a FLIT Work?
Upon the death of the testator, the residue of the estate is placed into the trust.
1. The Life Tenant
The primary beneficiary (usually the spouse) is entitled to receive all income generated by the trust for the remainder of their life.
2. Trustee Discretion
Trustees hold the power to pay capital directly to the life tenant or provide it as a loan.
3. Wider Benefits
This flexibility extends to other beneficiaries (such as children).
For example, trustees may exercise their discretion to use trust funds to assist a child with a mortgage deposit or other capital needs.
Pro Tip:
Because FLITs are highly flexible, it is essential for the testator to provide a Letter of Wishes.
This guides the trustees on how the funds should be distributed and highlights any specific concerns or priorities.
The Advantages of a FLIT
FLITs are widely used in estate planning due to the robust protection they offer:
- Generational Protection: Assets are protected on both the first and second death, ensuring they eventually benefit children or future generations.
- Asset Protection: Because the assets are owned by the trust rather than the individual, they are generally protected if a surviving spouse enters long-term care or faces bankruptcy.
- Remarriage Safeguards: The trust prevents assets from passing to a new spouse via a future Will, intestacy, or divorce proceedings.
- Third-Party Claims: Once the trust becomes discretionary, assets remain within the trust, protecting them from the personal liabilities of the beneficiaries.
- IHT Efficiency: During the life tenant’s lifetime, no anniversary or exit charges apply. The life tenant can also make gifts from the trust to reduce the overall IHT liability.
- Future-Proofing: Trustees have the power to convert the trust or end it early if tax laws change, ensuring the arrangement remains efficient for decades.
Tax Considerations and Disadvantages
While FLITs are powerful tools, they do carry specific tax implications.
Inheritance Tax (IHT)
For IHT purposes, the life tenant is treated as inheriting the trust assets.
If the life tenant is a spouse or civil partner, the spousal exemption applies, meaning no IHT is due upon the first death and the Nil Rate Band (NRB) remains intact to be transferred.
- Gifts: Gifts made from the trust are treated as Potentially Exempt Transfers (PETs) and are subject to the 7-year rule.
- Post-Death: Once the life tenant passes away and the trust becomes discretionary, it falls under the relevant property regime, meaning anniversary and exit charges may apply.
The Residence Nil Rate Band (RNRB)
It is important to note that if a main residence is left to a FLIT, the RNRB may not be available.
This is because, upon the second death, the assets pass into a discretionary trust rather than to direct descendants absolutely.
Future Liability
The primary disadvantage is that assets within a FLIT are treated as part of the life tenant’s estate for IHT purposes, potentially increasing the tax bill upon their death.
Expert Legal Guidance
Flexible Life Interest Trusts offer a bespoke way to balance the needs of a surviving partner with the long-term security of your children.
However, due to the complexities of IHT and the RNRB, professional advice is vital.
For advice tailored to your specific circumstances, speak to one of our specialists.
Call Us: 01483 910 865
Visit Us: www.opallegal.co.uk
Email Us: hello@opallegal.co.uk
