Estate planning is an essential aspect of managing your wealth, especially if you want to ensure that your assets are protected and passed down according to your wishes. One common method of achieving this is by setting up an Interest in Possession Trust. These types of trusts can provide security and financial stability for loved ones while also helping with inheritance tax (IHT) planning.
At Blackstone Solicitors, we advise clients across England and Wales on how to set up interest in possession trusts that align with their needs. In this article, we’ll explore who can set up an interest in possession trust, the requirements involved, and the key factors to consider.
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What is an Interest in Possession Trust?
Before diving into who can set up an interest in possession trust, it’s important to understand what it entails.
An Interest in Possession Trust is a legal arrangement where a beneficiary (known as the “life tenant”) has the right to benefit from the trust’s assets for the rest of their life. In many cases, this involves receiving income generated from investments or the use of a property (for example, living in a house owned by the trust). However, the life tenant does not have ownership of the underlying assets. After the life tenant’s death, the assets are passed to other beneficiaries, often referred to as the “remaindermen”—who are typically the children or other family members.
For many people, this type of trust strikes the perfect balance between providing for a loved one in the present and protecting the family’s wealth for the future.
Who Can Set Up an Interest in Possession Trust?
Anyone who is legally capable of managing their own financial affairs and owns assets in the UK can set up an interest in possession trust. This generally includes individuals who:
- Own Property or Substantial Assets
The primary reason people choose to set up interest in possession trusts is to manage valuable assets—often real estate or significant investments. If you own property or other valuable assets that you wish to preserve for future generations while still providing for loved ones, this type of trust could be a useful solution. - Are Looking to Provide for a Spouse, Partner, or Family Member
If you want to ensure that a spouse, partner, or other loved one is financially supported after your death, an interest in possession trust allows you to do this. The life tenant can live in a property or receive income from it while ensuring that the asset itself is ultimately passed on to your chosen beneficiaries, such as your children. - Have Complex Family Situations
If you are in a blended family or have children from a previous relationship, an interest in possession trust allows you to provide for both your current spouse and your children. You can grant your spouse the right to live in a property during their lifetime and ensure that after their death, the property passes to your children. This arrangement helps to prevent the possibility of the family home being passed to someone outside the family or being sold to cover care costs. - Are Concerned About Inheritance Tax (IHT)
Interest in possession trusts can also play a role in managing inheritance tax liabilities. By carefully structuring your assets through a trust, you can help reduce the amount of tax payable by your estate when you die, ensuring that more of your wealth passes to your intended beneficiaries. It’s important to remember that the life tenant’s interest will usually be included in their estate for IHT purposes, so professional advice is critical to optimise your tax planning strategy.
What Are the Legal Requirements for Setting Up a Trust?
Setting up an interest in possession trust involves a number of legal steps. These include:
- Being of Sound Mind
Anyone wishing to set up a trust must be mentally capable of making such decisions. This means they must fully understand the nature and consequences of creating a trust, the value of the assets they are placing into the trust, and who the beneficiaries will be. - Ownership of the Assets
You can only place assets you own outright into the trust. If the asset is jointly owned, all owners must agree to transfer the asset into the trust. For example, if you and your spouse jointly own a property, both of you must agree before it can be transferred into the trust. - Appointing Trustees
Every trust must have trustees—individuals or organisations who are legally responsible for managing the trust’s assets in accordance with the terms of the trust deed. As the person creating the trust (the “settlor”), you will need to choose one or more trustees. These could be trusted family members, friends, or professional trustees like solicitors. At Blackstone Solicitors, we often act as trustees for clients, ensuring that the trust is managed effectively and in line with your wishes. - Drafting a Trust Deed
The terms of the trust must be set out in a formal legal document known as a trust deed. This document outlines how the assets will be managed, who the life tenant and remaindermen are, and how the income or benefits will be distributed. Given the importance of getting this right, it is essential to seek professional legal advice when drafting the deed. - Transferring Assets into the Trust
Once the trust deed is drafted and signed, the assets (such as a property or investments) must be legally transferred into the trust. This involves a change in the ownership of the asset, which will now be held in the name of the trust rather than the settlor. The process of transferring property or other assets should be managed carefully to ensure all legal requirements are met, particularly if the asset is subject to tax or mortgage obligations.
Who Cannot Set Up an Interest in Possession Trust?
While most people can set up an interest in possession trust, there are some exceptions. These include:
- Minors (Under 18)
Individuals under the age of 18 are not legally able to create a trust in the UK, as they are not deemed capable of managing their own financial affairs. However, parents or guardians can create trusts on behalf of minors, with assets often being held in trust until the child reaches adulthood. - Individuals Without Mental Capacity
As mentioned earlier, you must be of sound mind to set up a trust. If a person is deemed to lack the mental capacity to manage their own financial affairs, they cannot legally create a trust. In cases where a person has lost capacity, a representative may be appointed by the Court of Protection to manage their assets, but this is a separate legal process.
Why Choose an Interest in Possession Trust?
There are several reasons why an interest in possession trust may be the right option for you:
- Control Over Assets
One of the biggest advantages of this type of trust is that it allows you to control how your assets are used after your death. You can provide for a spouse or loved one during their lifetime while ensuring that the underlying asset is protected for future generations. - Flexible Estate Planning
With an interest in possession trust, you can plan for both immediate and long-term needs. You can provide for your spouse or another beneficiary during their lifetime while ensuring that your children, grandchildren, or other heirs benefit from the trust after the life tenant’s death. - Inheritance Tax Planning
Interest in possession trusts can also offer tax advantages, helping to reduce the inheritance tax burden on your estate. By structuring your assets appropriately, you can help ensure that more of your wealth is passed on to your beneficiaries rather than being lost to tax.
Setting up an interest in possession trust is a significant decision, and getting it right requires expert advice. At Blackstone Solicitors, we specialise in estate planning and trust law, helping clients across England and Wales create trusts that protect their assets and provide for their loved ones.
If you’re considering setting up an interest in possession trust, contact Blackstone Solicitors today for expert advice tailored to your needs. We’re here to help you protect your assets and secure your family’s future.
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We have a proven track-record of advising upon all aspects of private client work. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.to incorporate, what kind of ownership
How to Contact Our Private Client Solicitors
It is important for you to be well informed about the issues and possible implications of dealing with trusts. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Trust solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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