Trust Types

trust

Most trusts fall into one of two main categories depending on how the income or benefit (dividends, interest, rents, free use of property etc) is dealt with:

Interest – in – Possession trusts
Those where the income or benefit must be given to a specific beneficiary – it is his or her’s by right.

Discretionary type trusts
There are several types but the common feature is that the benefits are allocated at the trustees’ discretion to any one or more of several beneficiaries. The trustees might even decide, for a time, to benefit no one; the income being accumulated for a future use.

Let us consider these in more detail:

INTEREST IN POSSESSION TRUSTS

The interest – in – Possession trust (sometimes called a “Fixed – interest” or a “Life – interest” trust or in Scotland a “life rent”) is often used in a Will when a person dies leaving a surviving spouse e.g. “To my wife for her life and then to my children.” The widow can enjoy the assets placed in the trust (shares, cash etc or the use of the family home) but is prevented from dissipating the trust capital. This can ensure that the children receive their inheritance. The same trust can be created in the Wills of two people marrying for the second time each having children by their first marriage. It ensures that the children of the first marriage do not see their parents’ wealth passing to the children of the surviving step-parent.

You might leave your estate to your spouse, in part as an absolute legacy and the remainder in trust for life. You can give the trustees wide powers to use their discretion over the capital to help in time of need, including the power to make capital advances or interest – free loans to, say, the widow. You may want to give shares in the family Company to your children or grandchildren but fear that they might sell or gift them outside the family. To avoid this the shares can be held in trust for, say, “my children equally for their respective lives and thereafter for my grandchildren who survive”. By this means the children and grandchildren benefit from the share holding but cannot control the voting power of the shares nor dispose of them – only the trustees can do that.

DISCRETIONARY TRUSTS

There are three main kinds of discretionary trust, all of which give the trustees the power to make gifts of capital and/or income to a stated class of potential beneficiaries. These are:
– The Accumulation & Maintenance trust
– a charitable trust
– a general discretionary trust
THE ACCUMULATION & MAINTENANCE TRUST (“A&M”)

This is ideal if your intended beneficiaries are under 25 years of age. Whilst under that age the trust can be managed in a discretionary fashion – using income or capital to assist any one or more of the young people. Moneys may be paid to the parents or guardians to help with school fees and other forms of maintenance. Alternatively the income may be retained and reinvested (“accumulated”) for use at a later date – hence the name Accumulation and Maintenance. Although it is a discretionary trust it is not liable to inheritance tax in the same way as other discretionary trusts. The most important qualifying condition for this favoured tax treatment is that the beneficiary must, on or before attaining 25, either receive the capital or be entitled to the income as of right. If you wish you could stipulate that the trust capital can be paid over to the young person once they attain 25. However, to protect a beneficiary who might be, or become, financially unstable then you can stipulate in the trust deed that, when they attain 25, they can only enjoy the income until the trustees feel that it is sensible to release the capital to them. This might be at any time – or never.

Parents of children under 18 should consider the tax consequences of this type of trust. Such parents will be taxed on any income they claim for maintenance. This disadvantage does not apply to a genuine grandparent’s trust or a “bare” trust – see later.

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