My practice commonly deals with clients below the inheritance tax threshold and their main asset is commonly the matrimonial home.
I have always been involved in looking at drafting protection into the wills to protect the half share of the property from remarriage, residential care, bankruptcy of the survivor etc.
These have been drafted on a life interest trust basis with no power to advance capital on the basis that the survivor wants to absolutely protect that asset for the children that they have. They are happy that the survivor has the right to remain for the rest of their lives and there is provision drafted for a substitute dwelling and any surplus cash provide an income to the survivor. (these are drafted on the basis that the survivor would still own there own half of the property and the cash assets have all passed to them on first death so there should be no concern from a lack of provision point of view).
However I wonder now whether the more flexible life interest trusts are more beneficial as potentially they provide the flexibility to the survivors change of circumstances but further protect from the children’s potential bankruptcy and divorces etc going forward. I appreciate that the flexible IPDI’s are more desirable where they are drafted over the entire estate cash as well (although these would not be beneficial for my usual clients as well within iht limits and no iht planning needs are likely).
Are we doing anything wrong in drafting in the way that we have previously and should the more flexible approach be adopted in the future? I worry with the flexibility we are providing the option to advance all not only to the spouse but to the remainder men as well and that this ultimately may not be what the client intends when setting up the trust.
Any thoughts and input on this would be greatly appreciated.
An excellent question, and in my experience it very much depends on the clients, their level of sophistication, the assets passing into the trust, and the testator’s choice of trustees.
The advantage of a fixed interest IPDI is that it is very simple to administer, and there is generally no problem with the spouse and or/children being the trustees. Generally speaking, only on the sale of the property, and the death of the life tenant, do the trustees actually need to do very much.
Once you start adding discretionary powers, however, it becomes less appropriate for the beneficiaries to also be trustees (you don’t want the spouse being able to unilaterally advance capital to themselves, for example, or block advances of capital to the children), and more and more likely that professional trustees should be considered. This in turn drives up the running costs of the trust, which may be difficult to justify where the trust does not actually hold any liquid assets.
However, those same powers become very much more important where the trust does hold assets outside of a share in the property. Proper investment of those assets requires greater trustee involvement in any event, and suddenly it becomes possible to make meaningful advances of capital (whether to the spouse or to the children), justifying the appointment of professional trustees and their expanded powers.
Thanks for the detail that you have provided. It is very helpful.
I wonder if you can assist in the following.
We have drafted life interest clauses with a discretion only for the life tenant to lend from the fund. If for example the surviving spouse moved out of the house into sheltered accommodation and then needed some cash for a holiday or for emergency hospital treatment that was not covered by the nhs - but it does not provide the power to advance capital. My understanding here is that as it is a discretion on the trustees they would not have to do so and if they did it does provide for the repayment and charging of interest. Do you think a local authority in anyway could attach to this - only a power to lend but not a power to advance the capital?