15 Mar

Overview A Flexible Life Interest Trust (FLIT) is a modern family trust that provides flexibility in tax-efficient ways to a surviving spouse and other beneficiaries. The trust allows the surviving spouse to stay in the marital home until their passing while ensuring the inheritance of the estate by the children or grandchildren.
The trust is treated as an interest-in-possession trust while the life tenant is alive, but on their death, it automatically becomes a discretionary trust and is treated as a relevant property trust. This trust offers flexibility and ongoing protection of trust assets for up to 125 years.

Advantages of a FLIT A trust is ideal for protecting family assets on the first and second deaths. It becomes a discretionary trust and can benefit future generations. The trust protects the estate if the surviving spouse goes bankrupt or into care, and also protects the assets from third-party claims. Trustees can loan money to beneficiaries to avoid affecting the size of their estate. No anniversary or exit charges apply during the life of the life tenant. Trustees can convert some or all trust funds into another type of trust. The trust can end early and distribute assets to beneficiaries if they wish to.

Disadvantages of a FLIT The FLIT would be treated as part of the life tenant’s estate for IHT purposes. If not considered as part of the estate planning, the RNRB & NRB, BPR & APR reliefs of the first to pass away could potentially be lost. On the life tenant's death, the trust will end and automatically become a discretionary trust; therefore, anniversary and exit charges that previously did not now apply.

How FLITs are taxed For IHT purposes, the life tenant of a trust is treated as inheriting the assets when the owner dies. If they're the spouse/civil partner & assets pass to the FLIT, spousal exemption applies, no IHT is due & NRB can transfer to the surviving spouse. No anniversary/exit charges apply during the life tenant's life. Trustees & life tenant can give gifts from the trust to other beneficiaries to mitigate IHT, considered PETS. On the life tenant's death, the trust becomes discretionary & is taxed under relevant property regime, where anniversary & exit charges may apply. If the primary residence is left to a FLIT, RNRB won't be available as the assets pass to a discretionary trust, not direct descendants.

Considerations. Consider the recipient's ability to afford property upkeep before granting a life interest. You can allocate money for maintenance in your will or from income-generating assets. Give trustees the power to sell property and offer a life interest to a surviving spouse in a new property. A life interest usually ends when the recipient dies but can end earlier if specified in your will.

Trustees. Trustees play a crucial role in ensuring that the trust operates effectively. They must balance providing for the surviving spouse’s needs and utilising the trust’s flexibility, including potential tax planning. Including the surviving spouse as one of the trustees is advisable since the long-term success of such trusts often relies on the spouse's active participation in planning. Carefully considering your options and reviewing every five years is the best way to ensure the trust works for you. 

Acknowledgement   I want to thank Manisha Chauhan from the SWW technical advice team for contributing much of this document's content.

How FLITs work When a testator dies, any remaining assets go into a trust. The life tenant, the primary beneficiary, is entitled to all of the trust's income during their lifetime. Trustees have discretion over the use of capital, which can be given or loaned to the life tenant or other beneficiaries. A Statement of wishes should be used to specify how the trust funds should be distributed.

Scenario 1) Andy and Beth are a married couple with two children and own a home. Andy passes away, and Beth automatically becomes the sole owner of the house and all the joint savings, pensions, and other assets. After several years, Beth marries Charles but fails to update her Will before passing away. As a result, Charles inherits everything left by Beth and then leaves the entire estate to his children. 

Scenario 2) Andy and Beth, before passing away, decided to divide the ownership of their house equally and created a Flexible Life Interest Trust (FLIT) with a Statement of Wishes in their Wills. According to the trust's rules, Beth can continue to live in the house until she passes away, gets married again, enters care, or no longer requires it, as specified in the trust. Initially, Beth faced financial difficulties, but Andy had left a Statement of Wishes with his other trustee, Dave, stating that he did not want Beth to suffer financial hardship. Therefore, Dave advanced £10,000 per year for six years from the trust assets to assist Beth. When Beth married Charles, her financial situation improved, and the value of the house increased, which could lead to an Inheritance Tax (IHT) liability if Beth passed away. Therefore, Beth, after consulting with Dave, gave £30,000 each to Andy and Beth's children to assist them with their weddings and moving home. After Beth's death, both her and Andy's IHT allowances were still available. The £60,000 gifted to the children eight years prior was exempt from IHT, resulting in half of the house being saved for Andy's children and £24k IHT being saved.

Scenario 3) If Beth moved into a care home. The FLIT moved Andy's 50% to his children, so it could not be considered for paying care home costs. 

Scenario 4) This time, Beth becomes bankrupt; Andy’s 50% does not belong to Beth and, therefore, can’t be taken to clear Beth’s debt. 

Scenario 5) This time, Charles pressures Beth to sell the house to pay his debts. Again, Andy’s 50% is secured and protected.

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