What is a FLIT?
A Flexible Life Interest Trust (FLIT) is essentially a mixture between a life interest trust and a discretionary trust. The trust will name a life tenant and other discretionary beneficiaries. Whilst the life tenant, who is usually the testator’s surviving spouse or civil partner, is alive they are entitled to all income generated by the trust. The trust also includes a discretionary power that allows the trustees to advance capital to the life tenant.
When the life interest ends the trust will then continue as a discretionary trust for the discretionary beneficiaries. The life interest will normally end on the life tenant’s death, but this may be earlier as the life tenant may relinquish part or all of their life interest or alternatively a FLIT may include a power for the trustees to revoke part or all of the life interest.
Asset protection is likely the main reason to place assets into a FLIT. Normally a FLIT would be used by a parent wishing to continue to benefit their spouse or civil partner but wish to assets continue to be protected for their children.
Whilst the life tenant of the trust is alive the trustees can benefit the life tenant, through the entitlement to income and the discretionary power to advance capital, but the assets held by the trust will be protected from third party claims such as bankruptcy or remarriage.
The other discretionary beneficiaries are also protected through the discretionary trust when the life interest ends. They are not entitled to the trust fund outright, and instead inherit at the discretion of the trustees and therefore will be protected from third parties. The trustees could then give that beneficiary occasional benefits until such time that the Trustees consider it safe for the beneficiary to inherit outright.
It is advisable for the testator to have a letter of wishes to guide the trustees on how they should distribute to the discretionary beneficiaries.
A FLIT offers flexibility as to how the trustees will benefit the beneficiaries of the trust. It may not always be sensible for each beneficiary to inherit capital outright.
The testator may for example wish for the trustees to make small gifts of capital to the life tenant outright or loan them large amounts of capital that would be repayable to the trust on death.
It may be the case that some of the discretionary beneficiaries already have assets exceeding the NRB themselves and do not wish to give themselves further tax liability. For them it may be more appropriate to only receive occasional benefits or loans of capital from the trust rather than receiving their ‘share’ outright.
A FLIT allows for the Trustees to convert some or all of the trust fund into another type of trust, so if IHT laws change in the future and make it more tax efficient for the fund to be in a different trust, the Trustees will be able to make that change.
On the testator’s death, the trust assets will be seen as passing to the life tenant of the FLIT for IHT purposes. Assuming that the life tenant of the FLIT is a surviving spouse or civil partner, there will not be any IHT due from assets passing into a FLIT on the testator’s death as the spousal exemption will apply. The NRB will therefore not be used and available to transfer. The trust assets will form part of the life tenant’s taxable estate and both NRBs can be used on second death.
Between the testator’s death and the life tenant’s death, the trustees and life tenant could attempt to make gifts from the trust to the other beneficiaries as a form of IHT planning. Any gifts made to the other beneficiaries would be seen as a potentially exempt transfer from the life tenant’s taxable estate and the usual 7 year rule will apply.
Whilst the life tenant is alive, there are no anniversary or exit charges to pay. These charges will apply for assets over the NRB after the trust becomes a discretionary trust.
Unmarried couples may consider using a FLIT, but they will be disadvantaged as they do not benefit from the spousal exemption or transferable NRB and other options may need to be considered.
A FLIT may not allow for full RNRB to be claimed. A previous article examined this in more detail.