Administrative Complexity of Life-Interest Will Trust

If a life-interest trust is set up by will which holds only the deceased’s property, what administrative burdens arise other than the following burdens:

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the need to register the trust,

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the need to update the register if details change,

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the need to submit a declaration that the details are up to date if the trust is liable for tax in a given tax year and

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the need to register closure of the trust.

Insuring the property….and getting the right insurance.

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Ascertaining how the trust administration costs are paid…

Sale and purchase of a replacement property…

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Do you mean whether the expenses are to come out of income or capital?

Good point, Karl. However, my understanding is one could make the beneficiary responsible for the insurance, which would avoid the problem.

The insurance has to be in the name of the legal owner but with the payment from the benef. Some Trustees use similar products for landlords, which aren’t really suitable. We have just set up insurance on a matter we are Trustees. However, the Trust includes cash so we settle it from that.

I see what you’re saying Karl, but chapter 10 of ‘the Inheritance Tax Planning Handbook’ on ‘Practical Trust Compliance and Administration indicates that ‘The terms of the trust usually provide for the occupant to maintain and insure the property…’, and, ‘If the trustees are not responsible for insurance then the trustees should request a copy of the relevant policy annually from the occupant, and ensure that the insurers have noted the trustees’ interest in the property on the policy and that it is insured for a sufficient sum…’. The wording seems to indicate that the beneficiaries can arrange a policy themselves. However, the trustees would still have administrative steps to take.

Good luck with the insurers with that approach…

If land is held in trust, even if there is a licence to occupy in place under which all of the legal owner’s responsibilities and liabilities are accepted by the life tenant/occupier, the trustees may remain liable to third parties who might suffer injury through, say, a failure to maintain the property. This may be the case even if the trust instrument grants the trustees extremely wide exoneration from liability.

In relation to insurance, if the policy is not in the name of the trustees as any claim would be paid out to the policyholder they may have committed a devastavit should the life tenant receive monies which are not applied to reinstate the damage. However, if the trustees are the policyholder, upon each renewal the trustees will be warranting to the insurer that the property is in good condition, etc. Unless the trustees are themselves satisfied as to the condition of the property such warranties might be considered to be made other than in good faith, which could result in the invalidity of the insurance cover.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

Thanks, Paul. That makes a lot of sense. One question still comes to mind: if the policy is in the name of the life tenant, in the absence of any agreement regarding the matter, would the life tenant be obliged to pay the money to the trustee(s). If not, it seems odd that trust deeds often make the beneficiary responsible for insuring the property as the beneficiary has no obligatltion to use the money to reinstate the property nor to pay it to the trustee so he can. The quote I refer to above about the trustee needing to ensure his interest is noted on the policy would also be odd as the trustee has no interest in the proceeds.

The Trustee also has an obligation to remaindermen. If the house burns down and either the cover isn’t in place, or it’s at an insufficient level, then the Trustee will be on the hook for it. So the Trustee does have an interest in the funds in so far as fulfilling the legal necessity to protect and adequately insure assets.

I may be wrong, but with every property I’ve been involved in insuring, it is either in the name of the estate (PR) or Trustee. I also know that Insurance Cos have told Life Tenants they’re unable to insure the property as they are not the legal owners.

I certainly agree with you that the trustees have an insurable interest, and you have better knowledge on the matter than me as you have have first hand experience of insurers telling life tenants they are not able to insure. That outcome does surprise me though as trust deeds often place the obligation to insure on the life tenant, and, furthermore, the quote, I refer to above has a detailed description of what the trustee should do to ensure the insurance taken out by a beneficiary ensures adequate protection. Of course, the ability of the life tenant to take out insurance is strictly a matter of insurance law of which I have no knowledge, and, in any event, even if allowed by insurance law, as you have said, it seems it is difficult to find an insurer who would grant a policy to the life tenant. Furthermore, even if an insurer would allow a life tenant to take out insurance, a question arises regarding whether that would protect the trustee: would the life tenant be obliged to either reinstate the property or pay the proceeds to the trustee. However, it seems the author of the book I have quoted above thinks insurance taken out by the beneficiary can provide adequate protection for the trustee, subject to the trustee ensuring the property is ensured for a sufficient sum and their interest being noted on the policy.

Once again, good luck finding an insurer who will insure in the name of the life tenant who isn’t also a legal owner…

Anyway, I’m moving on now…this is all getting somewhat tiresome…

I believe the wording in the will, or other trust instrument, effectively creates the life tenant as an agent of the trustees so that any proceeds of claim they receive they do so on behalf of the trustees.

With regard to Karl’s point about insurable interests, to be able to insure anything, one has to have an “insurable interest”. My understanding is that normally a life tenant has no intertest in the property itself for insurance purposes. However, if the trust instrument imposes on the life tenant an obligation to insure this does give rise to an insurable interest, so that an insurer could issue a policy of insurance. Clearly, different insurers would appear to have different attitudes towards such arrangements.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

There is case law support that both trustees and life tenants having insurable interests in trust property (as do executors); such interest must exist at the time of any loss. The general rule is that for an insurable interest the insured must stand in a legal or equitable relationship to the property insured.

Malcolm Finney

Some very interesting points raised here. I have done some research, and I found a highly relevant case (Mark Rowlands Ltd. v. Berni Inns Ltd. and Others [1986] Q.B. 211).

In that case, the claimant was the owner of a building and the defendant was the tenant of the basement flat in that building. The tenant paid a proportion of the insurance premium but was not named on the policy.

The defendant was treated as having an insurable interest because he benefited from the existence of the building and suffered prejudice from its destruction. The judge in that case then refers to another case which defines an ‘insurable interest’:

In order to refute it one only has to quote part of the classic definition of insurable interest given by Lawrence J. in Lucena v. Craufurd (1806) 2 B. & P. 269, 302:

“A man is interested in a thing to whom advantage may arise or prejudice happen from the circumstance which may attend it; … And whom it importeth, that its condition as to safety or other quality should continue: … To be interested in the preservation of a thing, is to be so circumstanced with respect to it as to have benefit from its existence, prejudice from its destruction.”

In my view, it is clear from this that a life tenant has an insurable interest in the property he occupies as he benefits from its existence and is prejudiced by its destruction, and I do not consider that to be dependent on the trust instrument imposing an obligation to insure on him. Furthermore, it is clear that one does not need to have an legal or equitable relationship to the property insured. This explains why somebody can take out an insurance on someone else’s life despite them not having a legal or equitable interest in another’s life.

Despite the tenant not being named on the policy, the claimant was treated as having insured the property for the joint benefit of himself and the tenant. Therefore, the benefit of the insurance, to the extent of the defendant’s interest in the subject matter of the insurance, belonged to the tenant. The reason the claimant was treated as having insured for both his benefit and for the defendant’s benefit was because that was the mutual intention of both parties. I would say that that is the reason the ‘Inheritance Tax Planning Handbook’ recommends getting the trustee’s name noted on the insurance as his name being on there is evidence in favour of the fact the insurance was not intended solely to be for the beneficiary’s benefit.

It is completely incorrect to say that “Furthermore, it is clear that one does not need to have an legal or equitable relationship to the property insured”. The need for a legal or equitable relationship to the property insured goes to the heart of an “insurable interest”. Furthermore it does not follow as you state “This explains why somebody can take out an insurance on someone else’s life despite them not having a legal or equitable interest in another’s life”.

Life insurance requires the person taking out the life insurance to have an insurable interest in the life assured. Without such an interest a life policy is not possible. The insurable interest re life insurance is based on natural love and affection or pecuniary interests.Without either there can be no insurable interest.

The case Rowlands v Berni Inns is about the enforceability of insurance contracts.

Malcolm Finney

Having looked into this further, it seems there is no longer any requirement for an insurable interest in indemnity insurance. This is because of the introduction of the Gambling Act 2005, which declares that gambling contracts are enforceable. However, the indemnity principle still applies, and the policyholder will only be compensated if he suffered a loss.

In any event, even prior to the Gambling Act, there was no need for a legal or equitable interest in the property:

‘In later cases, however, the courts moved away from a strict definition of
insurable interest. As Lord Justice Waller put it in Feasey, “something less than a
legal or equitable interest [in the property] … has been thought to be sufficient”’

The Law Commission state that, for the indemnity principle to apply,

‘The policyholder…requires an interest in the subject matter of the insurance or exposure to legal liability for the loss of another in order to have a valid claim.’

In my view, it is clear that a life tenant has an interest in the property he is occupying, and, therefore, any life tenant has an insurable interest. However, despite that, it may be that, for their own reasons, insurers are reluctant to allow life tenants to take out insurance.

See Part 5 of the Law Commission’s report:

So, before I finally do move on. I asked a contact of mine, a chartered insurance broker no less, who has developed insurance products for Trust and Probate Properties. He has many years experience in Insurance, with a specialism in this field.

“A good question but you are correct. The life tenant has no insurable interest in the property. It needs to be insured in the name of the owner.”

“If they continue to insure the buildings in their name the insurers are within their right to void the policy from inception as it’s a material fact (and decline claims as a result).”

Yours the ever faithful Karl Taylor

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Your contact is in my option incorrect to state that a life tenant has no insurable interest I trust property. An equitable interest in property is sufficient to create an insurable interest.

I’m also not convinced of the statement in your final paragraph. Whether as a matter of practice insurers refuse to accept a policy in the name of say a life tenant is a different matter.

Malcolm Finney