Trusts are an integral part of succession law. They are established by one or more persons (natural or legal) known as the settlor, who appoints trustees to look after assets for the beneficiaries of the trust.
There are various different types of trusts and each has its own purpose, requirements and tax implications to consider. Here we provide a summary of the main types of trust.
What are the main types of trust?
The main types of trust are as follows:-
A Discretionary Trust is a trust where the trustees have absolute discretion as to how the trust income and capital is distributed. This means that the trustees, exercising their powers which are contained within the trust deed (the document which establishes the trust), will decide when distributions are made and which beneficiaries should receive distributions.
A Discretionary Trust is often established to provide funds for a future need, such as to provide financial support or education costs for the settlor’s family.
Interest in Possession (or Liferent) Trust
An Interest in Possession (or Liferent) Trust is a trust where one or more beneficiaries (known as the liferenter) is entitled to the use and/or income from assets held by the trust during the liferenter’s lifetime.
The property is held by the trustees on behalf of the liferenter, who is entitled to use and enjoy the property. A common example of an asset which may be held in an Internet in Possession (or Liferent) Trust is a family home, which the liferenter will have the right to occupy and can live there rent-free. An Interest in Possession (or Liferent) Trust allows the assets to be held out with the liferenter’s estate and on their death, will pass to the capital beneficiaries of the trust.
A Bare Trust is a trust where one or more beneficiaries have an absolute entitlement to both the trust income and capital. The trustees essentially hold the trust assets on behalf of the beneficiaries.
A Bare Trust is most commonly used where assets are being held on behalf of minor children until they reach an appropriate age to hold the assets outright.
Accumulation and Maintenance Trust
Prior to the enactment of the Finance Act 2006, an Accumulation and Maintenance Trust was a special type of Discretionary Trust where beneficiaries were required to become absolutely entitled to at least their share of the trust income by the age of 25.
Accumulation and Maintenance Trusts can no longer be established. From 2008, following a transitional period after the introduction of the Finance Act 2006, these trusts are treated as Discretionary Trusts for tax purposes.
Trust for Vulnerable People
A Trust for Vulnerable People is established for the benefit of a vulnerable beneficiary, which is a person under the age of 18 whose parent has died, a disabled person eligible for certain benefits or someone who is unable to manage their own affairs by reason of a mental health condition under the Mental Health Act 1983.
There are strict conditions which a Trust for Vulnerable People must fulfil. This is largely due to the special tax treatment which these trusts are eligible for.
A Charitable Trust is a trust which is established solely for charitable purposes. The charitable purposes will be set out in the trust deed and are defined in the Charities and Trustee Investment (Scotland) Act 2005 for Scotland and the Charities Act 2011 for England and Wales. The activities carried out by the trust must be for the public benefit and this can include grants to individuals or organisations, following receipt of applications from prospective grantees.
In order to register as a charity, the Trustees must make an application to the Office of the Scottish Charity Regulator in Scotland and the Charity Commission in England and Wales. Subject to meeting the charitable criteria, a Charitable Trust enjoys special tax treatment.
What should I consider when establishing a trust?
Important matters to consider when establishing a trust are:-
What is the purpose of the trust?
Trusts can be established to fulfil various purposes, such as family succession planning (during lifetime or on death), asset protection purposes or tax efficiency. A decision must be made as to what type of trust is most appropriate, depending on the circumstances.
What are the tax implications of establishing the trust?
It is important to seek professional advice on the tax implications of establishing a trust. Each type of trust has Income Tax, Inheritance Tax and Capital Gains Tax considerations to bear in mind.
How we can help you
If you are looking for advice on setting up any of the types of trusts discussed, contact one of our specialists today.