Flexible Life Interest Trusts (FLITs) are a commonly used trust in wills. It combines the strengths of a traditional life interest trust with the adaptability of a discretionary trust, making it a useful tool for those who wish to protect family assets while retaining flexibility for future generations.
How Flexible Life Interest Trusts Work
A FLIT is set up by will. The trust will name a life tenant, usually the testator’s surviving spouse or civil partner, and a group of discretionary beneficiaries, often children and remoter descendants. While the life tenant is alive, they are entitled to all income generated by the trust, such as rent, dividends, or interest. This mirrors the arrangement in a standard life interest trust.
However, the trustees have discretionary powers to transfer capital. This means they can choose to provide capital to the life tenant if needed, for example in an emergency, or to the discretionary beneficiaries, which may reduce the life tenant’s interest in the trust. The decision to transfer capital is entirely at the trustees’ discretion.
When the life tenant dies, the trust does not automatically pass the capital to the discretionary beneficiaries. Instead, it continues as a discretionary trust, giving the trustees the power to decide who should benefit, when, and to what extent.
A standard life interest trust provides income to the life tenant and capital to fixed beneficiaries after their death. A discretionary trust gives trustees wide powers over both income and capital, with no guaranteed entitlement for any beneficiary. A FLIT combines these features, offering income certainty for the life tenant and flexibility over capital both during and after their lifetime.
Asset Protection
One of the main advantages of a FLIT is asset protection. During the life tenant’s lifetime, their entitlement is limited to income, not capital. This means the capital in the trust is generally protected from claims by the life tenant’s creditors, from future spouses, or from any financial misjudgement. Trustees can transfer capital if necessary, but there is no automatic right to it, which is a key difference from outright gifts.
After the life tenant’s death, the trust shifts to a discretionary arrangement. Beneficiaries do not have a fixed entitlement, which helps protect assets if a beneficiary is insolvent, vulnerable, or subject to claims from third parties. Trustees can delay or stagger payments, keeping assets in trust until a beneficiary’s circumstances improve. This is particularly useful in complex family situations.
Flexibility for Changing Circumstances
Family circumstances and financial needs can change over time. FLITs allow trustees to respond to events such as changes in the fortunes of children or grandchildren, family breakdowns, new marriages, or issues relating to disability or ill health. Trustees can make modest gifts or loans to the life tenant, with repayment to the trust on their death, or tailor transfers to beneficiaries for milestones like education or house purchase. Decisions are made based on the circumstances at that time, rather than the testator’s view at the time the will was written.
Inheritance Tax (IHT) Planning
If the life tenant is a spouse or civil partner, the gift into a FLIT benefits from the spouse exemption for IHT. The life tenant is treated as inheriting the trust property absolutely for IHT purposes, and no anniversary or exit charges are generally levied while they hold their interest. After the life tenant’s death, the trust becomes a discretionary trust and is subject to periodic and exit charges for IHT. Capital held in the trust after the life tenant’s death is not automatically added to any one beneficiary’s estate.
Trustees may consider making gifts of capital to other beneficiaries before the life tenant’s death, which, subject to the seven-year rule, can fall outside the scope of IHT. If the trust includes a qualifying residential interest for the Residence Nil Rate Band (RNRB), careful drafting is needed to ensure the trust structure allows assets to pass to lineal descendants.
Potential Drawbacks
There are some disadvantages to using a FLIT. The life tenant cannot force the trustees to transfer capital, which may cause concern if they expected to have access to capital sums. This can be mitigated by appointing the life tenant as a trustee, but transfer will still require agreement of the other trustees.
The tax obligations of a FLIT are more complex than a simple life interest trust, and professional advice is often needed. After the life tenant’s death, the trust may trigger periodic and exit charges if the fund exceeds the available nil rate bands. Continued use of a discretionary structure may also restrict access to the RNRB, leading to higher IHT liability.
For unmarried couples, a FLIT is less effective, as the spousal exemption and transferable nil rate band are unavailable.
Practical Considerations
Testators should prepare a comprehensive Letter of Wishes to guide trustees, given the extent of their discretionary powers.
The choice of trustees is important. Professional trustees or a mix of family and professionals may be appropriate where the estate is high value or complex.
The class of discretionary beneficiaries flexible enough to accommodate changes in family circumstances, for example including further descendants as potential beneficiaries rather than just children and potentially giving the trustees the power to add beneficiaries.
Conclusion
Flexible Life Interest Trusts are a valuable estate planning tool for those wishing to provide for a surviving spouse or civil partner while retaining flexibility for future generations. It is particularly suited to complex or blended families, where asset protection and adaptability are priorities. However, the complexity of the trust means detailed advice is essential, both when drafting the trust and during its administration.
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