Trusts have a variety of different uses in wills. Most of these are relatively well known by will writers, however there are times where very specific facts could warrant the use of a trust. In this regular feature of the newsletter we will cover situations where a trust could be recommended to a client that you might not have thought of.
This week, we will look at a situation where you may consider using a life interest trust where a testator is wishing to benefit a person but control where those assets go on their death.
Mr and Mrs Johnson both have children from previous relationships. They own a property together as joint tenants, some cash and investments in their own names. They each want to benefit the surviving spouse but want their own assets to pass to their own children when the survivor dies. They wish their wills structured so the surviving spouse inherits first. In Mr Johnson’s will, if Mrs Johnson has predeceased he wants his estate to pass to his children. Mrs Johnson wishes the same in her will so that her children inherit if Mr Johnson has predeceased.
What’s the problem?
Structuring the wills in this manner leaves the beneficiaries on the survivor’s death entirely down to who dies first.
If Mr Johnson dies first, his estate will pass to Mrs Johnson. When Mrs Johnson dies her entire estate, including assets inherited from her husband, will pass to her own children. Mr Johnson’s children will receive nothing in these circumstances. Where the wills are structured in this way, one side of the family will always miss out on an inheritance.
Drafting the wills in this way could be contentious, particularly in a situation where Mr and Mrs Johnson died in circumstances where it cannot be ascertained who died first, as a recent well reported case of two stepsiblings battling in court over the order of deaths illustrates. Due to the contentious nature of this, we will not draft wills for a couple where they are leaving assets to each other outright but wish to then have different beneficiaries when the survivor dies.
The simplest solution would be to consider a distribution in the wills on second death that is the same in both wills. This will ensure that regardless of who dies first, the beneficiaries on the survivor’s death will be the same. This could be 50% to Mr Johnson’s children and 50% to Mrs Johnson’s children or perhaps one set could receive a higher share, for example if Mr Johnson owns a larger amount of investments in his own name and wishes for a higher share to his children to reflect this.
Another option could be for them to not benefit the surviving spouse outright and instead to pass assets to a life interest trust, along with severing the tenancy of their property.
Say for example that Mr Johnson dies first, his estate could pass to this trust with Mrs Johnson as the life tenant and his children as the remainder beneficiaries. Whilst Mrs Johnson is alive, she would be entitled to the income from the trust. Powers to advance capital could also perhaps be included so that the trustees could pass occasional lump sums to her, which could be outright or on a loan basis. When Mrs Johnson dies, the trust capital will pass to Mr Johnson’s children and won’t pass by Mrs Johnson’s will. Mrs Johnson’s own will would pass her estate to her children at this point.
The use of a life interest trust will ensure that the surviving spouse can benefit, but also ensure that each spouse’s own assets will pass to their own families on second death.
If you would like any further advice on this, please don’t hesitate to contact us at [email protected].