A Flexible Life Interest Trust (often called a FLIT) is a type of trust that gives someone the right to benefit from assets during their lifetime while preserving those assets for other beneficiaries afterwards. The key feature is the flexibility it provides to trustees to adapt to changing circumstances, making it more versatile than a standard life interest trust.
In this guide
How does a FLIT work?
In a basic life interest trust, the life tenant has fixed entitlements - typically the right to income or to live in a property - with capital passing to other beneficiaries on their death. A FLIT works similarly but gives trustees additional powers.
These additional powers might include:
- The ability to advance capital to the life tenant if needed
- Power to vary the life tenant's entitlement in response to changing needs
- Discretion to appoint capital to different beneficiaries
- Flexibility to adapt to tax changes or family circumstances
This flexibility makes FLITs particularly useful where future circumstances are uncertain.
Who can benefit from a FLIT?
FLITs are commonly used in several situations:
Blended families
In second marriages, a FLIT can protect assets for children from a previous relationship while still providing for a surviving spouse. The flexibility allows trustees to respond if the spouse's needs change, for example if they require care.
Protecting vulnerable beneficiaries
Where a beneficiary has a disability or is vulnerable, a FLIT can provide ongoing support while protecting assets from being claimed by creditors or affecting means-tested benefits.
Uncertain future circumstances
When you cannot predict what your family's needs will be in ten or twenty years, a FLIT gives trustees the ability to respond appropriately rather than being bound by rigid rules.
The role of trustees
In a FLIT, trustees have significant responsibilities and powers. They must:
- Act in the best interests of all beneficiaries, not just the life tenant
- Exercise their discretion reasonably and fairly
- Consider the needs and circumstances of different beneficiaries
- Keep proper records of their decisions
Choosing the right trustees is therefore essential. Many families across Kent, including in Tonbridge and Sevenoaks, consider appointing a professional trustee alongside family members to ensure proper oversight.
Flexibility in practice
Consider a typical scenario: John leaves his estate in a FLIT for his wife Mary, with their children as remaindermen. The trustees have powers to advance capital if needed.
If Mary needs residential care and the costs are substantial, the trustees could advance capital from the trust to pay for her care. Without this flexibility, Mary might have to leave the property or the children might have to contribute from their own resources.
Alternatively, if one of the children faces a financial crisis, the trustees might have power to advance some capital to help, rather than waiting until Mary dies.
Tax considerations
FLITs have specific tax implications that differ from standard life interest trusts and from discretionary trusts. The tax treatment depends on several factors including:
- When the trust was created
- The value of assets in the trust
- How trustees exercise their powers
- Whether the trust is created during lifetime or on death
Tax rules in this area are complex and can change. Professional advice is essential to understand the implications for your specific situation.
Comparing FLITs with other trusts
It helps to understand how FLITs compare with alternatives:
- Standard life interest trust: Less flexible but simpler; the life tenant has fixed entitlements
- Discretionary trust: Maximum flexibility but potentially less tax-efficient and the life tenant has no fixed entitlement
- Right to occupy: Simpler arrangement just for property occupation; less comprehensive
The right choice depends on your specific circumstances, family dynamics, and goals.
Things to consider
Before establishing a FLIT, consider:
- Who should the life tenant be?
- Who should ultimately inherit (the remaindermen)?
- Who should be trustees, and how many?
- What powers should trustees have?
- What guidance should you give trustees through a letter of wishes?
- What are the tax implications?
Key takeaways
A Flexible Life Interest Trust combines the security of a life interest with the adaptability of trustee discretion. It can protect assets for future generations while providing for a surviving spouse or partner, and the flexibility to respond to changing circumstances. Professional advice is essential to ensure the trust is properly structured and tax-efficient.
Frequently Asked Questions
What is a Flexible Life Interest Trust?
A Flexible Life Interest Trust (FLIT) gives someone the benefit of trust assets during their lifetime while allowing trustees flexibility to adjust how assets are used. Unlike a standard life interest trust, a FLIT can give trustees discretion to advance capital or vary the beneficiary's entitlement.
Who can benefit from a FLIT?
FLITs are commonly used to protect a surviving spouse while preserving assets for children, particularly in blended families. They can also benefit vulnerable beneficiaries who may need flexible support rather than fixed entitlements.
How is a FLIT different from a standard life interest trust?
In a standard life interest trust, the life tenant has fixed entitlements. A FLIT gives trustees more flexibility to respond to changing circumstances, such as advancing capital for care costs or adjusting the beneficiary's position if their needs change.
What happens to the trust assets when the life tenant dies?
When the life tenant dies, the remaining trust assets pass to the 'remaindermen' - the beneficiaries specified in the trust deed. This is usually children or other family members who were waiting to inherit after the life tenant.
Are there tax implications with a FLIT?
Yes, FLITs have inheritance tax implications that differ from standard life interest trusts. The tax treatment depends on when and how assets are transferred. Professional advice is essential to understand the implications for your specific situation.