A liferent trust is used where the person who owns an asset wishes to allow someone else to have the benefit of it whilst passing on ultimate ownership to someone else. Whilst a liferent trust can be created during the owner’s lifetime, it can also come into force when the owner of the asset dies.
If you are considering creating a liferent trust, contact our expert team here for advice and guidance to meet your needs
The most common use of a liferent trust is in a Will. It is normally used in relation to the family home, allowing the surviving spouse or partner to continue to live in the family home until their death. At that point, the ultimate beneficiaries will inherit the deceased’s interest in the property absolutely.
When the title to the house is in the joint names of the parties, you will need to check whether there is a survivorship destination. If there is, that means on the death of one of the parties, their share in the house automatically transfers to the survivor. This needs to be changed if a liferent trust is to be used. There is a straightforward process to change the structure of the title. This is called evacuating the special destination. When a title is structured without a survivorship destination, this means each party can decide who should inherit their share in the house and under what circumstances.
A liferent trust provides an element of protection to ensure the ultimate distribution of your estate is in line with your wishes. This can be particularly useful if you have children from a previous relationship, or if your spouse or partner is vulnerable or incapacitated.
By comparison, if your leave your estate absolutely to your spouse or partner, it is entirely up to them what they do with that during their lifetime or on death. There is no guarantee that the children of the first deceased (i.e. the step-children of the surviving spouse) would inherit anything.
You can avoid this situation by using a liferent trust. It would mean that when the first spouse or partner dies, their share in the house would be transferred to his or her children whilst their spouse or partner enjoys the right to occupy the house until their death. After that, the children can do what they wish with their share in the house.
A liferent trust is a useful mechanism that can allow you to provide benefit to your family in different ways following your death. A liferent trust allows you to retain control over how your family is cared for when you no longer can.
A liferent trust is also useful when planning for long-term care. It can enable you to leave your share of the house for the benefit of your spouse or partner following your death, but without that automatically falling liable to meet the cost of their care. This can mitigate the capital value of the financial assessment the local authority conducts to decide what, if any, contribution to the cost of care should be made.
A liferent trust can also be used for Inheritance Tax planning to transfer ownership to children rather than to a spouse or partner.
When a liferent trust is created, it will need to be registered with HMRC once it comes into effect. In addition to Inheritance Tax, there may be Capital Gains Tax and Income Tax implications to take into account. All these points should be considered carefully and discussed with professional advisers.
Fraser Scott is an Associate in our Asset Protection group. He is a specialist in estate planning, and regularly advises clients on liferent trusts. If this article has raised any questions or you are facing any of the challenges we have described then get in touch with one of our expert lawyers by completing our contact form or calling on 0131 225 1200.
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