Following on from our first blog in this series on how a Trust in your Will can help protect vulnerable and disabled beneficiaries, we will now look at another case study and consider the benefits of using a Flexible Life Interest Trust to provide for a beneficiary who is vulnerable to making unwise financial decisions.
How Flexible Life Interest Trusts can be used to protect vulnerable and disabled beneficiaries
Case Study
Fred and Carol are married and have three adult children – Sophie, Mark, and Simon. Their combined estates are worth approximately £900,000.
Fred and Carol would like to ensure that their three children are equally provided for when they die. However, Simon has had substance abuse issues and ran up a significant amount of debt in the past. Fred and Carol are concerned about his ability to manage his money if he were to receive a substantial inheritance from them outright.
They consider leaving their estates to just Sophie and Mark equally to ensure that Simon doesn’t receive anything directly which could be spent by him on alcohol or drugs. They trust Sophie and Mark to provide for Simon from their inheritance.
However, Fred and Carol’s solicitor points out that:
- Sophie and Mark might not choose to benefit Simon from their inheritance. They also might not be able to do this, for example, if they died before Simon or lost mental capacity.
- Their Will could be challenged by Simon under the Inheritance (Provision for Family and Dependents) Act 1975 on the basis that he has not been adequately provided for as their child.
Therefore, after meeting with their solicitor and considering their options, Fred and Carol decide to make their Wills leaving everything they own to the survivor of them and then, after they have both died, equally between their three children but with Simon’s one-third share being left on a Flexible Life Interest Trust for his benefit. They appoint Sophie and Mark and their solicitors to act as the trustees of the Trust.
Flexible Life Interest Trusts are a tax-efficient way of providing in a Will for minors, young adults, or beneficiaries who might be vulnerable to making unwise financial decisions.
The Trust set up in the Wills for Simon will operate as follows:
- It will be set up only once both Fred and Carol have died.
- One-third of their joint estates will pass into the Trust and will be the Trust fund.
- The trustees appointed in the Wills will arrange for the Trust fund to be invested.
- The income generated from the invested Trust fund (e.g., interest, dividends, rent) will be paid directly to Simon.
- Simon is not entitled to the capital from the Trust fund but the trustees can, if they all agree, advance some or all of this to him as and when they think fit.
- Fred and Carol’s Wills state that when Simon has died, if there is anything left in the Trust fund, this will be inherited by Simon’s children if he has any but if not then by Sophie and Mark equally.
Fred and Carol also make a Letter of Wishes setting out guidance to their trustees as to how they wish them to exercise their discretion when considering how and when to advance any capital to Simon.
The trustees will be able to consider all of Simon’s circumstances, including his mental and physical health as well as his financial needs, before deciding whether to pay out capital to him. The Trust can continue for Simon’s lifetime if the trustees think this is needed or they could bring it to an end by paying out all the capital from the Trust fund to Simon if they think this would be in his best interests.
For example, the Trust fund could be used to buy a property for Simon to live in. The Trust could own the property, but Simon could have the right to live there rent-free. Alternatively, if Simon had been doing well for a long period of time, the trustees might decide to pay out all the capital to him.
The Flexible Life Interest trust enables the trustees to control what capital Simon receives. They can use the Trust to protect Simon from himself and from others seeking to take advantage of him.
Get in touch
Karen Salt is an Associate in our Wills, Trusts and Probate team.
If you would like more information or advice concerning Flexible Life Interest Trusts or would like to arrange a meeting with Karen or another member of the team in Derby, Leicester or Nottingham, please contact us on 0800 024 1976 or via our online enquiry form.
Contact us