Life interest trusts remain popular, especially for blended families, because they protect capital for children while giving a surviving partner income and/or a right to occupy the home. A life tenant of the trust is commonly also named as a trustee. Difficulties arise however when a life tenant trustee loses capacity: routine trust administration can grind to a halt, and replacing the incapacitated trustee is not as simple as using the usual appointment power. This article explains the issue and how careful will‑drafting can avoid delay and cost.
Life interest trusts in plain terms
A life interest trust (also known as an interest in possession) typically gives the life tenant:
- a right to income from the trust assets; and/or
- a right to occupy a trust property (commonly the family home).
On the life tenant’s death, the trust usually ends and the capital passes to the remaindermen (for example, the children). Variations exist, such as a flexible life interest trust (FLIT), which continues on a discretionary basis after the life tenant’s death.
When a life tenant is also a trustee
Appointing the life tenant as one of the trustees is common and, in many cases, sensible provided there are other trustees alongside them. It gives them visibility and a voice on decisions about maintenance, investments, and sale or retention of the home.
However, problems can arise when a life tenant trustee loses capacity, because this disrupts the trustees’ ability to act and can halt trust administration entirely.
When a life tenant trustee loses capacity: why administration can stall
Trustees generally have to act unanimously unless the trust deed expressly allows decisions by majority. Most wills and trusts are silent, so unanimity is the default.
A trustee is not automatically removed on loss of capacity. If a trustee lacks capacity, they cannot discharge trustee functions, there is no unanimity, and the trust can be left at a standstill until that trustee is removed and replaced.
This risk becomes particularly significant when a life tenant trustee loses capacity, as both their trustee role and beneficial position intersect.
Why the standard replacement route may not work
Ordinarily, S36(1) Trustee Act 1925 provides the following with the power to replace a trustee who is “incapable of acting”:
- S36(1)(a) allows a person nominated by the trust to replace a trustee, or failing that:
- S36(1)(b) allows the surviving or continuing trustees to.
Will trusts do not commonly nominate a person to have this power, so it will ordinarily be the continuing trustees who exercise this power under S36(1)(b). However, S36(9) restricts the power where the trustee to be replaced also holds an interest in possession under the trust. In that case, the appointment power under s36(1)(b) cannot be used to remove them without involvement of the Court of Protection. In practice, an application to the Court of Protection is required to authorise removal and appointment. While this is well intentioned to protect the rights of the person without capacity, but it can be slow and costly.
S36(9) only applies to a replacement by the S36(1)(b). If the trust does nominate a person to exercise the power under S36(1)(a) it will not apply and Court of Protection approval is not required.
Best practice if capacity is waning
If there are early signs of diminishing capacity, the life tenant should be advised to retire as trustee while still capacitated. That avoids a later deadlock. In reality, this is not always possible: capacity may be lost abruptly, or the trustees may be unaware of the concern.
WillPack’s drafting approach
To pre‑empt the s36(9) obstacle, our current precedent for wills creating life interests now includes an express clause providing that a trustee who lacks capacity (as confirmed in writing to the trustees by a suitably qualified medical practitioner) is to be treated for trustee purposes only as if they had died.
What this achieves:
- Treating the incapacitated trustee as “deemed deceased” switches on the ordinary replacement mechanics, so the continuing trustees can appoint a new trustee without a Court of Protection application.
- The life interest is untouched. They remain the life tenant, entitled to income and (if applicable) occupation.
Related point: attorneys are not trustees
Attorneys acting under a Property & Financial Affairs LPA (or under an old EPA) do not step into the donor’s shoes as trustee. Their authority act in relation to any trustee role is extremely limited. Where a donor who happens also to be a trustee loses capacity, the vacancy must be handled under trust law; it cannot be fixed by attorneys attempting to exercise trustee powers.
When a life tenant trustee loses capacity – Conclusion
Loss of capacity in a life tenant who is also a trustee exposes a weakness in many life interest arrangements. Because trustees must act unanimously and the usual appointment powers do not apply, even routine decisions can become impossible. Understanding what happens when a life tenant trustee loses capacity allows advisers and trustees to plan ahead, ensuring the trust remains operable and trustees are not left waiting on Court of Protection processes at an already difficult time.
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