What is a trust?

A trust is a vehicle set up to hold assets for the benefit of people known as beneficiaries. The people holding the assets are known as trustees. The person that has placed the assets into trustees are known as the Settlor.

What type of trusts can be created?

There are various types of trusts which can be created during someone’s lifetime, or through their Will on their death. These include the following: –

Bare trust

This is a very basic type of trust and provides that all assets will go to the beneficiary once they attain 18 years of age. As with all trusts, the assets are held in the names of the trustees, but once the beneficiary attains 18 years of age, they have the right to request the assets are then transferred to them. A trust like this is normally used to pass assets on to young beneficiaries when they get to 18 years of age. A very simple example, would a savings account held by a parent for their minor child.

Life interest trust

This is also commonly known as an interest in possession trust. Again, the assets are held by the trustees but the beneficiary is entitled to the income from the trust that it generates. Alternatively, the beneficiary can benefit from the use of the assets held in trust.

For example, a life interest trust might contain a portfolio of stocks and shares, and the income on these would be payable to the beneficiary who would then declare the income on their own tax return. The beneficiary would not own the stocks and shares and could not give them away, lose them or spend the capital value.

Alternatively, as a different example, a beneficiary may be entitled to occupy a property or a share of it for their lifetime on the basis they keep the property in a good state of repair, insure it and make the usual outgoings. Again, this property or the share of it would not belong to that beneficiary but they would be able to use it rent free.

Discretionary trust

This is the most sophisticated type of trust whereby trustees have complete control over the assets and the income they generate. There will normally be a list of beneficiaries who are entitled to be considered for a distribution of capital or income, but no one would have a quantifiable definite right to receive income or capital from the trust.

Because they are so flexible, discretionary trusts can be used in a wide range of situations.

An example might be where an older family member decides to transfer assets into a discretionary trust with a view to reducing the size of their estate for Inheritance Tax purposes for the trustees to manage these investments to eventually benefit their children and possibly grandchildren.

Because the trustees have the ability to use their discretion as to who benefits, different situations that might arise over the course of time can be catered for.

Another example might be where a parent wishes to benefit a child when they pass away through their Will but they have concerns about that child’s ability to manage money. In such circumstances, a discretionary trust is likely to prove a useful vehicle to allow the trustees to manage these funds and allocate capital and income to the beneficiary when appropriate.