Understanding The Different Types of Trusts

There are different types of trusts. You should get advice on which type will achieve your objectives.

The two most common types of trusts in the UK are:

Discretionary

With this kind of trust, you choose your beneficiaries and give the trustees complete discretion over how much the beneficiaries get and when they get it. You can even make it possible for trustees to add the beneficiaries. You use this kind of trust for maximum flexibility so that the trustees can take their decisions based on the circumstances at that time.

Interest in possession

This is a kind of trust that gives the beneficiaries a right to the income. That means that if any funds in the trust are invested, the beneficiaries chosen by the settlor will get the income from the investment. This kind of trust is used to provide for certain beneficiaries to get the income while the capital is ring-fenced for other beneficiaries. For example, a couple in their 70s could use the trust to provide income for their daughter in her 50s. The capital can be ringfenced and protected for the grandchildren. That means that if she gets divorced, the trust asset is not lost to the ex-spouse.

Other types

All other trusts are a variation on the theme of the discretionary and interest in possession trust. For example, you can use a special trust for people with disabilities whilst ensuring their benefits are not affected by payments from the trust. These attract some inheritance tax breaks if used possible.

You also have a special kind of trust known as a protective trust. It protects the assets from irresponsible beneficiaries. It starts off as an interest in possession but converts to a discretionary trust if the beneficiary tries to sell or give away the asset.

There are also trusts for children. These were popularly known as accumulation and maintenance trusts. They have lost their popularity since they lost their special tax treatment in 2006.

You can also set up charitable trusts to create a new charity. This comes with very good tax breaks but you do have to comply with the regulatory provisions to get them.

You can set up all these trusts in your will as well. The person making the will is the settlor. The executors will be the trustees unless you choose different trustees. Since 2006 there are some special will trusts for children and spouses that give good inheritance tax breaks.

A trust can also be used to shield life policy and pension proceeds from inheritance tax.

You can also create offshore trusts, usually in low tax jurisdictions although if you are UK resident or domiciled you won’t escape UK tax.

You also have bare trusts. They don’t achieve any tax savings because they are taxed on a see-through basis. They are often where people own property jointly but only one person’s name is on the title. A bare trust can be used to acknowledge the other person’s interest in the property. It can also be used to hold funds or assets for minors who will become entitled to the asset when they reach the age of majority.

As you can see, there are a number of different types of trusts. It’s up to you to seek advice about which trust will help you achieve your objectives. It’s different trusts for different strokes!

Get in touch if you would like some advice on whether a trust will work for your circumstances and what inheritance tax savings you can make with a trust.

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