Flexible Life Interest Trusts and CLT

Not sure whether to do this as a follow up question to JoanneR or a question in it’s own right.
Cients with a substantial estate (£4million) leaves residue into a Flexible Life Interest Trusts - life interest to spouse, with flexible powers of appointment / advancement. On surviving spouse’s death the trust becomes discretionary for his children from his first marriage.
It is likely that after the first death, the trustees will want to terminate the life interest and advance most of the estate to the children immediately, and probably directly to them rather than to remain in the FLIT. The surviving spouse is much younger and likely to survive 7 years.
Does this cause problems with CLT (Gill Steel mentioned this recenty), or is that only if the assets continue to be held on disretionary trust after the life interest has been terminated? If so, would it be better if the FLIT is drafted so that after the life interest ends the estate goes directly to the children?

Many thanks in advance

Steve Wilkes

My understanding is if the trustees terminate the widow’s life interest in favour of children absolutely then this will be a PET by the widow.

If the trustees terminate the widow’s life interest but the assets remain in Trust, then this will be treated as a CLT by widow, so any amount above the available nil rate band will be taxed immediately.

If the widow dies then her estate is taxable and whatever is held in the life interest trust is aggregated with her estate. (Any gifts the widow makes within seven years preceding her death are also subject to tax.)

If the assets remain in Trust, then there may exit charges if the trustees appoint the assets to the children absolutely (after the widow’s death). However, for asset protection reasons etc. it may be useful for the assets to be held in Trust on second death.

Kind regards

Ihsan Ali
I Will Solicitors Ltd