Life Interest Trust and Equity Release


(justinwallace) #1

A makes a Will leaving the entirety of their estate on a life interest trust for partner, B. A and B co-own a property and subsequently enter into an Equity Release. A has now died.

How would forum members treat the accruing interest on the life interest trust?

My view is that B has a life interest in A’s net estate - i.e. the value of A’s interest in the property less the value of A’s share of the equity release at the date of A’s death. If this is correct then we either need to realise the property (and allow B a life interest in the net proceeds) or, agree with B that any further accretion to A’s share of the equity release will be the responsibility of B.

My rationale, such that it is, is that it cannot be fair to A’s remainder beneficiaries to continue to hold A’s share in the property with interest accruing and reducing their ultimate entitlement.

Any confirmatory or alternative views welcomed!

Justin Wallace
Brewer Harding & Rowe


(Tim Gibbons) #2

A very interesting question and as far as I know, one with no direct authority so far.

I think the starting point has to be : what were the intentions of the testator, A? In particular, was the will made before, at the same time, or after the equity release mortgage?

Tim Gibbons


(Paul Saunders) #3

Unless the equity release agreement, or any side agreement, provides otherwise, I would have thought that the interest pertaining to A’s interest in the property was a valid charge against the residuary income of his estate, so that B was entitled only to the balance of the residuary income after deduction of A’s share of the interest.

However, this raises further questions, as in most cases where equity release is used I understand the interest is rolled up and payable only on a sale of the property - in which case:

  1.  Does the repeal of s.2 Apportionment Act 1870 result in A’s share of interest no longer subject to apportionment on a day to day basis and is to be treated as the liability of the estate income only when it becomes due and payable?
    

Following on

  1.  if the property is sold whilst B has an interest in possession, is the whole of A’s share of the interest deductible against B’s income entitlement?
    
  2.  If so, is B liable to satisfy any shortfall immediately, or will it be reduced only by the annual income to which B would otherwise have received?
    
  3.  If B dies before the shortfall is cleared, does it remain a liability of their estate, or does their dearth terminate the liability?
    
  4.  If the property is sold only after the death of B, at which time their interest in possession has terminated, does the liability fall on the remaindermen of A’s estate.?
    

I do not suggest that members of this forum should seek to answer the above questions, other than perhaps commenting on the first. If my understanding of the effect of the Trusts (Capital and Income) Act 2013 is correct, then the scenario described in the initial posting would appear a mischief not in mind when the legislation was drafted.

Whilst my thoughts are reflected in my further questions, I am not aware that there has been any qualitative guidance published around this and it would be interesting to know if any professional bodies have considered the situation.

I also fear that even if the will and equity release were completed at the same time, the relationship between the respective provisions might not have been fully considered.

Paul Saunders


(justinwallace) #4

Thanks Tim and Paul. In a sense I am happy that others are not sure there is a definitive answer to this!

The Will and Equity Release were taken out more or less at the same time but we have no information regarding the Testator’s intentions. The only person possibly that could provide this information is the partner, B.

Whilst the Equity release decreases the capital value of the trust asset, there is also an argument that the value of the property may increase over time (although not perhaps to the same extent).

Justin Wallace
Brewer Harding & Rowe