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Life Interest Trust – Probate

To qualify as an immediate post death interest a number of c o n d i t i o n s must be satisfied. If they are, then the treatment of the interest can avoid certain charges that other trusts are subject to. To qualify as an immediate post death interest the settlement must have been created by Will or under the rules of intestacy and must arise immediately on death. This means that the life interest cannot be postponed to a future time (although note that a survivorship clause of up to six months will not effect this). This also means that if a Will creates successive life interests then the first one will be treated as an IPDI but not the subsequent ones, which would be subject to the relevant property regime. To qualify the interest cannot be under a bereaved minors trust or a trust for a disabled person and this must have been the case since the life tenant became entitled to the interest. If these conditions are satisfied then it is classed as an immediate post death interest. The benefit of this is that there are no principle trust charges or ten yearly and exit charges. The life tenant is deemed to own all the underlying trust assets for IHT purposes. This fiction does not operate for other purposes. It therefore follows that, for IHT purposes, when the life tenant dies there is a deemed disposal of all the trust assets and these assets will be subject to IHT along with the life tenant’s estate. This fiction also applies to a lifetime termination. If the life tenant surrenders or assigns all or part of the interest then the life tenant is deemed to make a Potentially Exempt Transfer and no IHT will be payable if the life tenant survives for seven years. If the life tenant sells his interest he will be making a PET of the value of the trust assets less any consideration received for the life interest. Because of the above this means that the remainderman under a life interest will own nothing as far as IHT is concerned. This means that he can assign his interest without any IHT consequences while the life tenant is still alive. If the life tenant becomes beneficially entitled to the property then no IHT will be payable. This is because the life tenant is already deemed to own the assets for IHT purposes. If the trust is a lifetime creation then it will be subject to the relevant property regime and will be taxed as if it is a trust without an interest in possession. IHT will therefore be payable on creation if the reduction in value of the of the settlor’s estate is large enough and there may be ten yearly and exit charges too. Accidental creation of a life interest In a will that is badly or incorrectly worded a life interest could be accidentally created by using words such as ‘to my wife then to my children’. On the face of it this appears to create a life interest to the wife creating a trust over the property which will ultimately pass to the children. S. 22 of the Administration of Justice Act 1982 however creates a statutory presumption against a life interest and, in the example above, the wife would inherit the estate absolutely regardless of the purported gift to issue.

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