Will planning issues are often easier to understand when viewed through a real client scenario. This article is based on a recent enquiry, with names and certain details amended for confidentiality.
It focuses on a common concern in practice, how best to structure a Will when leaving a property in the family line is a key aim. Clients may want a child to benefit from a property during their lifetime, but also want to ensure that the property is not lost outside the family on that child’s death, divorce, or financial difficulty.
The Background
The testator is a single mother who has been diagnosed with a terminal brain tumour. She is in the process of downsizing and intends to purchase a property for her son.
Her wishes can be summarised as follows:
- the property should be held by trustees until her son reaches 18;
- the trustees should be able to let the property in the meantime;
- once her son is 18, he should be able to live in the property;
- her son should not own the property outright; and
- after her son’s death, the property should pass to his children, rather than outside the family.
In essence, the client wants to provide security for her son while preserving the underlying capital for future generations.
She defined this as using a “bloodline trust”, and while it can be a helpful description, it is not a technical legal term. We therefore needed to advise on how to draft the will with recognised trust structures.
Where leaving a property in the family line is the priority, the drafting needs to balance certainty, flexibility and tax efficiency.
Structuring a Will for Leaving a Property in the Family Line
In cases like this, the main considerations are usually:
- certainty, so the child has a guaranteed ability to live in the property;
- flexibility, so trustees can respond to changing circumstances over time;
- asset protection, particularly against divorce, bankruptcy, or creditors; and
- inheritance tax efficiency, including whether the residence nil rate band may be available.
An Overview of the Main Trust Options
There are three trust structures most commonly considered in this type of scenario.
1. Discretionary Trust
Under a discretionary trust, the trustees control how the trust assets are used. The property is held for a class of beneficiaries, for example the son and his descendants, and the trustees decide who benefits, when, and to what extent.
Applied here, the trustees could let the property while the son is under 18 and later decide whether he should occupy it.
The main advantage of a discretionary trust is flexibility. If the son’s circumstances change, the trustees can adapt. This structure can also offer strong asset protection, as the son has no fixed entitlement to the property.
The main disadvantage is lack of certainty. The son would not have an automatic right to live in the property and would instead be reliant on the trustees exercising their discretion.
From an inheritance tax perspective, a discretionary trust will fall within the relevant property regime. This means that ten‑year anniversary charges and exit charges may apply. It is also generally less favourable for the residence nil rate band, which would not be available if the property passes to a discretionary trust. However, it could be made available if all or part of the property is appointed to descendants (or on life interest trusts for descendants) within 2 years of death.
2. Life Interest Trust
A life interest trust gives a beneficiary a defined right to benefit from trust property. In the context of a property, this typically takes the form of a right to occupy and entitlement to income.
Used here, the Will could provide that the trustees hold the property, let it until the son reaches 18, and then allow him to live in it for the rest of his life. On his death, the property would pass to his children or other specified beneficiaries.
This is often the most straightforward option where the client’s primary concern is ensuring that the child can live in the property.
The main benefit is certainty. The son would have a clear right of occupation and entitlement to income, rather than having to rely on trustee discretion. Capital is also preserved for the next generation, as the property passes under the terms of the trust rather than under the son’s own Will or intestacy.
The drawback is reduced flexibility, the trustees may have limited ability to respond to future changes in circumstances. It also providers weaker asset protection as although he doesn’t own the capital outright he does have more defined interest in an entitlement to income and right to live in the property. There is also no protection for his issue.
For inheritance tax purposes, where the life interest is structured as an immediate post‑death interest, and is considered as part of the son’s estate for IHT purposes. The trust will not be subject to ten‑year anniversary charges or exit charges while that interest continues. Residence nil rate band will also be available given that he is considered as inheriting the property.
3. Flexible Life Interest Trust
A flexible life interest trust can provide a useful middle ground. It gives the son a defined right to benefit from income during his lifetime, but after his death the trust continues on discretionary terms for his children or other descendants.
After his death, the trust continues on a discretionary basis and the trustees would retain discretion over how the property, or any sale proceeds, are applied for the benefit of the other discretionary beneficiaries.
This structure offers certainty for the son and flexibility for the next generation, which can be particularly helpful where the future circumstances of children or grandchildren are unknown. It is often attractive where leaving a property in the family line is an important objective, but long‑term flexibility is also required.
The main drawback is increased complexity, both in drafting and administration. From an inheritance tax perspective, the position is usually favourable while the life interest continues, but once the trust moves fully into discretionary form it will fall within the relevant property regime.
Which Structure Is Likely to Fit Best?
On facts like these:
- where maximum flexibility and asset protection are the priority, a discretionary trust may be appropriate;
- where the client wants the son to have a guaranteed right to live in the property from age 18, a life interest trust is often the more natural choice; and
- where that certainty is required for the son, but flexibility is desired thereafter, a flexible life interest trust is often the best compromise.
A practical point in this case was that the client is terminally ill. Depending on her prognosis, if time is short it may be sensible to include a discretionary trust in the Will initially. This gives the trustees wide powers immediately after death, with the option to appoint the property into a more tailored structure within two years.
Where applicable, section 144 of the Inheritance Tax Act 1984 will treat such an appointment as though it had been written into the Will from the outset, which can be valuable for inheritance tax planning as if it needs changing to a life interest or flexible life interest this will be possible.
Capacity and the Golden Rule
A separate consideration was also required due to the client’s terminal brain tumour. A diagnosis of serious illness does not automatically mean a client lacks testamentary capacity, but it does increase the risk of a later challenge.
It was advisable to consider the Golden Rule, to obtain contemporaneous medical evidence where possible and keeping full attendance notes and supporting records.
Conclusion
This example demonstrates why careful trust drafting is often required where property is involved. Outright gifts are rarely suitable when a client wants a child to benefit without inheriting absolutely, while also safeguarding value for future generations.
There are potentially a variety of trust solutions and the right Will trust can provide immediate security for a child while achieving the longer‑term objective of leaving a property in the family line.
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