Need a bit of clairty on this please! If an entire estate is left into a life interest trust for a spouse, what are the IHT consequences for the spouse and the daughters on the testator’s death?
To alleviate this IHT liability on the life tenant’s estate, could the powers of advancement of capital apply to the spouse to then give a PET to the daughters?
What would be an alternative option to a life interest trust to provide better for the daughters but still keep the spouse happy?
Thank you
The assets left in the life interest trust are considered part of the spouse’s estate on the 2nd death, there are no immediate IHT implications.
Hard to say without knowing the estate, but if it has a reasonable property/other assets split, then the other assets could be given directly to the spouse, so that they can gift this as they like and afford following the 1st death, whilst still preserving the TNRB from the 1st death for the spouse (which would be eaten into by giving part of the estate to the daughters on the 1st death, hence letting the spouse make the PETs).
Thank you for your reply. I thought that on the 2nd death - (spouse) life tenant - the estate is subject to IHT if they die?
Yes, that’s what I meant by saying that the life interest assets are considered part of the spouse’s estate, which may lead to IHT being paid on the 2nd death (though also not depending on the size of the estate and allowances available, including any transferable allowances from 1st death).
I trust that you are aware of the ful allowances against IHT being that each has a nil rate band allowance of £325,000 and each may also have a residential allowance of £175,000. Therefore the estate value may not have a tax liability f it is below £1,000,000.
If the estate could be in excess of this, you may wish to consider financial planning with a specialist tax adviser.
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
I would recommend you read chapter 9 of Whitehouse & King’s ‘A Modern approach to Wills, Administration & Estate Planning’