Types of Trust

Bare Trusts

A Bare Trust is the same thing as a “simple Trust.”  It is one where the beneficiary gains an immediate, absolute right to the assets in the Trust and the income generated.  A settlor (the person placing funds into trust) creating a Bare Trust is certain that the assets in the Trust go directly to the beneficiary or beneficiaries they choose.  Once this Trust has been set up, the beneficiaries can’t be changed.

Interest-in-Possession Trusts

An Interest in Possession Trust entitles the beneficiary, as of right, to the Trust income as it is generated. The Trustee must pass all income received to the beneficiary.  If the beneficiary is entitled to the income for the duration of his or her life, he or she is known as a “Life tenant.”  The capital of the trust usually passes on the death of the life tenant to other named beneficiaries.

For example in a Will a person leaves a surviving spouse an interest-in-possession e.g. ‘income to my wife for her life and after her death capital to my children’.  The income from the trust will be paid by the trustees to the spouse, as of right, for her entire life with the capital being held for the deceased’s children and paid to them on the death of the spouse.

Discretionary Trusts (or Accumulation Trust)

A Discretionary, or Accumulation Trust lets Trustees have discretion about how the Trust’s income and/or capital is used.  In a Discretionary Trust, the Trustees must run the Trust to benefit the beneficiaries. In accumulation Trusts, Trustees can accumulate the Trust’s income until the beneficiary is legally entitled to the property or the income generated by the Trust.

A Discretionary Trust may suit you if you have identified a particular group of people you want to benefit but you are unsure which of them, in the future, will need help or in what proportions.  For example, as a grandparent you might like to set aside capital for your grandchildren – including those who may be born later, even after your death. Some of them might be more in need than others and family and financial circumstances could change from year to year.

Mixed Trusts

Mixed Trusts are a mixture of multiple types of Trusts.  Some of the assets in the mixed Trust may be set aside as an interest in possession Trust, while other assets may be treated in the manner of a Discretionary Trust.  These Trusts may be used for the benefit of sibling beneficiaries who attain the age of majority at different times.

Settlor-Interested Trusts

Settlor-Interested Trusts are Trusts in which the settlor, or the settlor’s spouse or civil partner may also benefit from the Trust.  An example of this would be a Trust in which the settlor knows he or she will be incapacitated (e.g. by illness) and sets aside assets in a Trust for his or her own future income or for income for his spouse, civil partner, or child.

Vulnerable Beneficiary Trusts/Disabled Trusts

Trusts for Vulnerable Beneficiaries are set up for someone who is physically or mentally disabled, or someone under the age of 18 whose parent has died.  With these Trusts, Trustees can claim special treatment for capital gains taxes and income taxes thus making them beneficial for tax purposes.

The Charitable Trust

You may be inclined to make regular donations to charity or you may have a particular interest in some worthy cause.  Rather than make regular payments out of income or a legacy to a national charity over which you have no control, you could create your own family charity either in your lifetime or on your death by creating a Charitable Trust in your Will.

Gifts to such a trust are free of capital gains tax and inheritance tax. The income arising will not generally be assessed to tax. Of course the trust can only be used for charitable objects i.e. the relief of poverty, the advancement of religion, education or the public good.  Charitable Trusts can last forever – a truly lasting memorial.

Matching a Trust to Your Needs

Whether creating the trust by Will or in your lifetime, selecting the trust type and its terms are very important. In this brief summary we have mentioned only the main types of trust; there are many variations – for example the protective trust.

These and the other trust types have differing tax effects which must also be considered. For maximum flexibility it is usual to give the trustees wide management powers so that they are better able to respond to any changes in family matters or taxation – not least changes in Government. With such wide trustee powers be sure to choose your trustees carefully.