Are life interest trusts unfair for spouses/civil partners?
This week marks the lead up to International Women’s Day and I wanted to share some thoughts on women, wills, trusts and estates.
Where the word ‘spouse’ is used in this article this can be assumed to include civil partnerships and whilst it is accepted that ‘spouse’ includes different sexes, this article is concerned predominantly with the impact of Will trusts on women who are often, the financially weaker party in a relationship.
A ‘life interest’ or ‘interest in possession’ trust in a will allows the testator on death to benefit someone (eg their surviving spouse) from their estate but in a way that protects the capital pass to someone of the testator’s choosing (eg the testator’s children from an earlier relationship). It entitles the lifetime beneficiary (eg the spouse) to receive income from the trust and occupy any trust property. This structure avoids the risk of the surviving spouse inheriting the testator’s estate, on death, and then leaving it to whomever they please (and not who the testator intended) on their later demise.
Sometimes, to provide more flexibility on the testator’s death, assets are instead left to a ‘discretionary trust’ in which the surviving spouse has no life interest but is one of a few potential beneficiaries. These types of Will give the executors/trustees discretion as to how to distribute the estate taking into account the circumstances at the time as well as any Letter of Wishes the testator has left giving them guidance. They can therefore take account of the value of the estate, the tax rules and the personal circumstances of the potential beneficiaries. There are certainly good reasons to include these trusts in Wills and they can give significant peace of mind to a testator, but what of the surviving spouse who may have no knowledge of the trust or that their home of many years is even held in trust? With no immediate entitlement to receive capital from their late spouse, they have to rely on the decision making of the trustees to make provision for them. This process can work well where the trustees are professionals or the couple’s shared children. Where, however, they are the children from the testator’s earlier relationship and those in line to eventually inherit, it would be an unusual situation where the trustees’ decisions are not impacted by their emotion and attitude towards the surviving spouse.
Case Study
Let’s examine a scenario; Bob and Marilyn are married. Bob has adult children from his first marriage. Marilyn is younger. Bob brought most of the assets to the marriage, not an uncommon scenario in ‘traditional’, marriages and wants to provide for Marilyn on his death but also preserve his wealth for his adult children. His will grants Marilyn a life interest in his estate and states that it passes to his children on Marilyn’s death. There’s no inheritance tax when Bob dies and the trust fund isn’t treated as part of Marilyn’s capital if she needs to apply for local authority care fee funding later on. Perfectly fair, one might think, but is it? Marilyn might have had children with Bob, she might have spent years of her life devoted to caring for those children enabling Bob to work and build his business and estate. Had they divorced it is not inconceivable she would have received more. Perhaps Marilyn wants to pay for private care but does not have enough of her own assets to do so, is it really fair that her late husband’s estate is protected and held for his adult children who might feasibly have their own assets and income whilst Marilyn cannot afford to meet her own costs?
Had Marilyn and Bob divorced, consideration would have been given to ensuring, as much as possible, she was in the same financial position following divorce as she was in during the marriage. The Court considers a variety of factors including whether there are children of the marriage, the contribution to the marriage, the length of the marriage and the size of the pot. Yet in the above scenario Bob (or his trustees) are able to make their own assessment as to what is reasonable provision for Marilyn. In my experience, this often involves Marilyn having to enter into negotiations with the trustees whilst she is still coming to terms with the loss of Bob and trying to negotiate some form of provision from his estate. Whilst the trustees might have a discretion to make provision for Marilyn, they are sometimes reluctant to do so in case this causes upset with the other beneficiaries, often the trustees themselves. In a situation where reasonable financial provision is not made for Marilyn she would have to bring a claim against Bob’s estate under The Inheritance (Provision for Family and Dependants) Act 1974.
As a spouse Marilyn is eligible to claim under the Inheritance Act and in considering her claim the Court will first consider whether an interest in a trust or life interest constitutes ‘reasonable financial provision’, if not, then what provision is ‘fair in all the circumstances’. At this point the court will take into account similar factors to any family court on divorce; including the length of the marriage, the age of the claimant and the size of the estate.
A way forward
Across the border in Scotland the position is very different, a surviving spouse has legal rights to inherit a share of the spouse’s estate including the matrimonial home (depending on value). A spouse’s rights cannot be completely disinherited unlike in England and Wales. The position is similar in other European countries which have forced heirship regimes.
I'm not suggesting there should be some form of forced heirship for spouses.Neither am I suggesting we abolish trusts or life interest trusts for spouses, there are usually good reasons for making such trusts and they often work well. What I am suggesting is there needs to be better communication and advice to spouses when they set up the trusts and draft their Wills. First, they need to carefully consider whom to make their trustees, it should be of no surprise that adult children from an earlier marriage, are not always sympathetic to the surviving spouse. Professional trustees can be more expensive but are less emotionally involved.
Secondly, ideally they should have the conversation with their spouse whilst they are still alive so that nothing comes as a surprise when one of them dies. Joint consideration of shared assets and who brought what to the marriage is a discussion better had when both parties are still able to contribute to that discussion.
Finally, there should be more consideration of what each spouse would receive if the marriage ended in divorce rather than death. This should either take place when the trust is being established or by the trustees after death. The starting point should usually be equality or at the very least what is ‘reasonable in all the circumstances’. Considering this at an early stage or at least provide detailed guidance to trustees in this regard is likely to assist the trustees in considering what provision should be made.
One thing is clear we will continue to see claims being brought by spouses where an interest in a trust fails to make reasonable provision for them.
Read more about Irwin Mitchell's expertise in Will, Trust and Estate Disputes.
