Guide to Flexible Family Trust Will
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Guide to Flexible Family Trust Will
You may like to listen to our podcast entitled Flexible Family Trust Guide On Death as it lays out clearly the benefits of Flexible Life Interest Trusts and the process to follow on death.
In this podcast, Ian Winterbotham addresses some of the most common questions raised online. Before addressing the following questions, it should be pointed out that the Trustees are the legal owners of the assets but are not necessarily the beneficiaries. Typically the surviving spouse will be both a Trustee and beneficiary of the assets. The Trustees have a fiduciary duty to act in the beneficiaries’ interests.
What happens to the Flexible Life Interest Trust or FLIT upon the death of the first Trustee?
Technically, if a Trustee dies, you just replace the Trustee. But what this question is really referring to is what happens to the FLIT upon the death of the first beneficiary.
The first beneficiary is one of the couple who have written the wills in the first place. When your spouse or civil partner dies, the Will creates a Trust that takes in their assets.
Those assets could be half of a property – typically the property you live in – plus part of any investment property, cash or other investments in the sole name of the person who has died.
The Trust gives a life interest to the survivor, which means the legal right to income. The survivor can actually take all their spouse’s assets, put them into their own name and write a loan agreement which explains that they have borrowed them from the Trust created by the husband or wife’s Will.
It means you can have the best of both worlds. You can use the assets however you like, and invest them for growth, but they’re protected and won’t be lost if the local authority comes along to grab the property to pay for care fees. They are also protected for your children if you get remarried as a surviving spouse.
Will the surviving Trustee still have use of the property and money?
The answer is yes. The half of the family home is an asset of the Trust.
The surviving beneficiary has the legal right to live in the property and enjoy that asset for the rest of their life. The same goes for any cash or investments their spouse may have had.
Trustees can transfer that into the surviving partner’s name and they can enjoy that money, invest it or spend it, but it’s a loan that has to be paid back when they die.
Is the surviving beneficiary still able to have access to the Trust assets?
The surviving beneficiary can take all the assets their deceased husband or civil partner had, transfer them into their name, let them grow or spend them as they want. The rest of the Trustees cannot force them to pay it back, because decisions have to be made unanimously.
As long as the surviving spouse or civil partner is a Trustee, they can be confident that they can spend all the money. They’ve built up that money with their husband or wife or civil partner during their lifetime.
But if there’s cash left, it’s not going to be lost to a second husband or wife, or because they’ve become vulnerable due to Alzheimer’s, dementia or another condition that requires long-term care.
What happens to any Trust property held in the deceased Trustee’s name?
It’s an important question, because people are not going to want to instruct this type of Will unless they’re really confident that their own interests are protected. You want to know that half of the home you’ve lived in all your life is still under your control.
You can take the Trust assets and use them as a deposit on a new home. If you want to downsize and you decide to buy a property for half the cost of your existing home, you can put all the new property into the Trust.
That ensures the whole property is protected for the children and won’t be lost to pay for care fees or on remarriage, etc.
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Can the Trust’s terms be altered by any remaining Trustees?
The Trustees are given powers to transfer assets into another Trust or deal with assets as they see fit.
That’s certainly the case after the second death, when the Trust terms can be altered by the remaining Trustees. The beneficiaries can ask them to alter the Trust’s terms and maybe add further potential beneficiaries.
If your children adopt or foster children, for example, they may want them to be potential beneficiaries as well.
Do the beneficiaries have any rights to challenge decisions made after the first Trustee’s death?
Legally, people can make a challenge. But after the first beneficiary’s death, the surviving spouse or civil partner has a legal right to enjoy those assets. That means they have a legal right to live in the property and to the income from any other assets.
Beneficiaries could have rights to challenge decisions after second death, if they think Trustees are not doing their fiduciary duty.
But after the second death, the Trustees have discretion. It’s effectively a discretionary Trust and the Trustees have a duty to distribute assets in the beneficiaries’ interests. Beneficiaries do have a comeback – they can go to the courts if they think the Trustees are not being fair.
Are there any immediate legal or administrative steps required upon the death of the Trustee?
If a Trustee dies, as long as there is at least one other Trustee, that Trustee or Trustees can appoint a replacement.
It’s a fairly simple matter of paperwork that most solicitors can deal with. If a beneficiary dies, you need to get a Grant of Probate and implement the Trust created by the Will of the first person to die.
Are there any tax implications related to the death of the first Trustee?
This question is about the tax implications related to the death of the first spouse or civil partner. Because of the exemption for spouses, which applies to civil partners as well, there should be no tax implications at all.
All assets and life interest – the right to live in the property and enjoy the assets – can be passed over free of tax. But these assets are all taxed on second death.
What happens if there is no immediate successor Trustee identified in the Trust deed?
If there is another Trustee or Trustees, it’s a simple matter of appointing any further Trustees they wish.
What happens on death of the second Trustee in a Flexible Life Interest Trust?
The person asking this wants to know what happens when both their parents die. The Flexible Life Interest Trust that’s created by the first Will, and then the second Will, both become discretionary Trusts.
Typically, you’re trying to benefit all the children equally, but actually the Trustees do have discretion. You need to be aware of this – it doesn’t have to be distributed equally. Therefore you have to appoint Trustees who you trust to be fair.
Lots of different scenarios could occur. A very common one these days is where one of your children is in a relationship which may not last forever. That person, with the other Trustees – who are usually their siblings – may decide that they don’t want to have all the cash in their bank account. If they did get divorced, that money would then not go across to their husband, wife or partner.
When will I gain access to the Trust’s assets or income?
The surviving spouse gains access straight away, as we’ve talked about. The children or other beneficiaries have no rights to the assets or the income until both parents have died.
What happens to the Trust assets if the life tenant passes away?
This is exactly the same answer as above.
Is inheritance tax payable if the Trust’s value is below £325,000?
Unless there were very specific circumstances where lots of gifts were made during the beneficiary’s lifetime, the answer is no. There is no inheritance tax payable.
What else do we need to know about Flexible Life Interest Trusts?
The process really is to look at your own circumstances and talk them through with a consultant. We’re here to guide you and explain your options.
The main thrust of these types of Trusts and wills is to protect assets for the bloodline. I know a lot of people feel strongly about that – they get very cross when they think that the local authority could come and take away what they’ve worked for and struggled to pay the mortgage for.
This is a relatively simple and inexpensive way of stopping all of your hard-earned work disappearing in the last years, should you end up in long-term care.
The information given is not complete and you should seek guidance and help from a professional before making any decisions.
