What Is A Trust?

Bare Trusts

Bare trusts are often used to pass down assets to minors. Trustees oversee them until the beneficiary is of age to do so themselves.

Assets put in a bare trust are held under the name of a trustee until the beneficiary has the right to claim possession of all capital and income from the trust. This occurs at age 18 or over (in England and Wales), or 16 or over (in Scotland). Any assets set aside by the settlor will pass directly to the beneficiary.

Interest in Possession Trusts

This is a trust where at least one beneficiary has the right to receive an income generated by whatever is being held in the trust (if trust funds are invested in shares for example, the beneficiary could receive the profit) or the right to enjoy the trust assets for the present time in another way (such as living in a home held in trust). The beneficiary has the right to enjoy the trust property and are said to have an ‘interest in possession’. They might also be described as an ‘income beneficiary’, or ‘life tenant’.

A trust can give the interest in possession to a beneficiary for a fixed period, for an indefinite period or as is often the case, for the rest of the beneficiary’s life. A life interest trust is the most common example of an interest in possession trust.

Discretionary Trusts

A Discretionary Trust is when money or other assets from your Estate are left in Trust which is to be managed by an appointed Trustee or Trustees, who decide which people are to become beneficiaries, when they should receive any inheritance and how.

Depending on the terms trust deed, trustees can make decisions on:

• How much is paid (income or capital)
• Which beneficiary is paid
• How often payments are made
• Conditions attached to the trust regarding the beneficiaries

Discretionary trusts are often set aside for:

• Future contingencies such as a grandchild who may need more financial help in the future than other beneficiaries
• Beneficiaries who are underage or lack the capacity to deal with money themselves

A Discretionary Trust is particularly useful if you are unsure of how to distribute your Estate or if that decision would be directly influenced by other circumstances that might arise in the future such as the birth of more grandchildren or a sudden change of circumstances.

Accumulation Trusts

An accumulation trust is a trust in which the trustee does not distribute the income from the trust, but gathers the income and any profits from any sale of trust assets and holds them in the trust, until the trust expires. The specifics will stated in the creating document.

Mixed Trusts

Mixed Trusts are a mixture of different types of Trust. Some assets in a mixed Trust may be set aside as an Interest in Possession Trust. Other assets may be treated in the manner of a Discretionary Trust. These Trusts are often used for the benefit of family member beneficiaries who all reach adulthood at different times.

Settlor-Interested Trusts

Settlor-Interested Trusts are Trusts in which the settlor, or their spouse/civil partner may benefit from the Trust. An example of this would be a Trust in which the settlor knows that at some point in the future, he or she will be incapacitated and therefore puts assets in a Trust for his or her own future care and/or for the income of the spouse.

Non-Resident Trusts

This is a trust where the trustees are not resident in the UK for tax purposes. Tax rules concerning non-resident trusts are very complicated.

Non-resident trusts are usually set up if:

• None of the trustees reside in the UK for tax purposes
• Only certain trustees reside in the UK and the settlor was one of the following:
  • not resident
  • not normally resident
  • domiciled in the UK when the trust was set up or funds added

Parental Trusts For Children

As the title suggests, these are trusts set up by parents for children under 18; minors who have never been married or in a civil partnership. They’re not a category of trust in their own right but will be either:

• A bare trust
• An interest in possession trust
• An accumulation trust
• A discretionary trust

Trusts For Vulnerable Beneficiaries

Some trusts are set up specifically to maintain vulnerable people, disabled people or children. These trusts get special tax treatment and are called ‘Trusts for vulnerable Beneficiaries’.

Who is a vulnerable beneficiary?

A vulnerable beneficiary is

• Someone under 18 whose parent has died or
• A disabled person who is eligible for any of the following benefits (whether or not they receive them):
  • Attendance Allowance (either the care component at the middle or highest rate, or the mobility component at the highest rate)
  • Personal Independence Allowance
  • Increased disablement pension
  • Constant Attendance Allowance
  • Armed Forces Independence Payment

A vulnerable beneficiary might not be able to manage their own finances and legal issues because of a mental health condition. A medical professional will be able to do it for you if a person’s condition is covered by the Mental Health Act 1983.