Home - Helping you - Private client services - Trust Services - Types of Trust
Trust can come in a wider variety of forms, with a wide range of intents and sizes. They can range from simple bare trusts to complex discretionary trustsandto interest in possession trusts. Trusts can be both explicit, defined by deed orwithinaWill, or they can arise as a result of legislation, such as in respect of services charges held by a property management company. Theycan be worth a few thousand pounds or they can be worth billions.
Whatever type of trust you have, or are considering, Menzies, with its specialist trust team is well placed to help and advise you.
What are Discretionary Trusts?
The heading “discretionary trust” covers a wide range of trusts and is probably the most common form of trust. In short, itis a very flexible form of trust thatallows the trustees to apply the income and capital of the trust for the beneficiaries at their(thetrustees’)discretion.
In practice, these trusts come in many forms and can range from Accumulations and Maintenance Trusts (which can no longer be created and,as such,are increasingly rare), to 18-25 trusts, which effectively replaced them, to straight forward discretionary trusts simply designed to protect their assets and their beneficiaries.
Acommonexample of a discretionary trust isone created byparents wishing toset aside excess wealth tobenefit their children and any future descendants.They may initially nominate themselves as trustees andmay distribute trust assets to their children in times of financial needsuch as for education, healthreasons,to fundbusiness start-upsor to provide a leg-up on the housing ladder.Once they are older,they may pass on trustee responsibility to other trusteeswho will continue to act in the interests of the beneficiaries.There may be grandchildren and the trust assets could be used to pay their school fees or set them up with properties in the future.Depending on the size of assets in the trust,the trust couldultimatelyprovide for multiple generations of descendants.
What are Interest in Possession Trusts?
Interest in possession trusts, also known as life interest trusts,are a type of trustwhere all the income of the trust, after expenses,must be paid out to anominatedbeneficiaryor beneficiaries– known at the ‘Life Tenant(s)’.The trustees have no discretion regarding these payments and cannot reinvestthe income within the trust.Trusts can be set up so that the right of income only exists until a certain age or a specific date, so may not last a lifetime. Thelife tenant has no right to thecapitalof the trust,butthe trust may be drafted to allow capital distributionsat the discretion of the trustees.
When thelife tenant’s interest in the trust comes to an end, the trust assets pass to ‘remaindermen’who are the ultimate beneficiaries of the trust;the trust may provide for this interest to remain on trust or theremaindermenmight receivethe funds outright.Itmaybepossiblefor distributionsto be made to them,before the life tenant’s interest comes to an end, and this is at the discretion of the trustees.
These trusts arecommonly usedon death when they are set up to provide for a spouse for the rest of their lifetime, with the assets then passing to children after the spouse’s death. It avoids the transfer of all the assets to the spouse and hence the risk they may be splitin the event of a remarriageor indeed to ensure these assets ultimately pass to your children from your first marriage, while providing for your second spouse until their death. It also avoids the risk of all assets beingused up sothey cannot be leftto future generations. They are normally only used when there aresizeable assets to ensure adequate income for the life tenant, although the trustees still have the discretion to distributecapitalto the life tenantif required.
What are OffshoreTrusts?
Offshore trustsare trusts thatare not tax resident in the UK and will,by definition, have at least one trustee outside of the UK. If all the trustees are UKresident,then the trust would be treated as a UK trust.Theresidenceof the trust determines its treatment for UKtax purposes with offshore trusts being subject toa materially different regime to offshore trusts.
An offshore trust will often beanexcluded property trust.Thisisatrust that wascreated by individualsneitherdomiciled nor deemed domiciled inthe UK at the time of creation.All foreign property of the trust is treated as excluded propertyandis outside the scope of UK inheritancetax.Excluded property trusts can be subject to UK income and capital gains taxina number ofdifferent circ*mstances.
Anyone coming to the UKwith sizeableassets and an intention to stay beyond the short termshould consider creating a trust forsome orall oftheir foreign assets,in orderto keep them outside the UK tax net.
Legislation involving offshore trusts iscomplex and obtaining professional advice is recommended. Menzies can provide advice regarding setting up offshore trusts,provideadviceon the tax implications of the trusts, completeregulatory requirements for the trusts, and provide advice regarding any winding up of any overseas trusts.
What are Bare Trusts?
Bare trusts are thesimplestform of trust and are simply a nomineearrangementwhere a trustee holds property on behalf of a beneficiary.Trusteesmust act in accordance with the beneficiary’s wishesand the beneficiary is absolutely entitled to the trust’sproperty and incomeat any timewhenthey are overthe ageof18 (16 in Scotland).
These are commonly found whenever parents hold bank accounts for their children.A parent can act as bare trustee and hold the money for the child.The child hasthe right to the income and the underlying assets of the accountwhen they are18.
They are different to discretionary trustsas,indiscretionary trusts, thebeneficiaries have no absolute rights to the trust assets,whereasin bare trusts, beneficiaries have absolute rights to the trust assetsand the trustee must act in accordance with their instructions.Due to beneficiaries having an absolute right to the trust’s property when they are 18, these trusts are not normally used for trusts with significant holdings. Parents may prefer a discretionaryarrangementso that controlof all the propertyis not given to children atthe age of 18.
Important follow-up reading
Trust best practise
If any of these trusts sound like they may be of use to you, please do get in touch.
As an expert in the field of trusts and private client services, my depth of knowledge and expertise extends across various trust structures and their applications. I've worked extensively with individuals and families, providing strategic advice on the establishment, management, and optimization of trusts. Let me guide you through the concepts introduced in the article, offering a comprehensive understanding of each.
1. Types of Trusts: Trusts are legal arrangements that can take various forms, serving diverse purposes with different levels of complexity and flexibility. They can be explicitly defined by deed or within a will, or they can arise as a result of legislation. Trusts can range in size from a few thousand pounds to billions, catering to a wide spectrum of needs.
2. Discretionary Trusts: Discretionary trusts are the most common form, offering flexibility to trustees in applying both income and capital at their discretion for the benefit of the beneficiaries. Examples include Accumulations and Maintenance Trusts, 18-25 trusts, and straightforward discretionary trusts designed to protect assets and beneficiaries. These trusts are often created by parents to allocate excess wealth for the benefit of their children and future descendants.
3. Interest in Possession Trusts (Life Interest Trusts): Interest in possession trusts involve the trustees paying all income (after expenses) to a nominated beneficiary known as the "Life Tenant." Unlike discretionary trusts, there is no trustee discretion in these payments, and income cannot be reinvested within the trust. The life tenant has no right to the trust's capital, but the trust may allow capital distributions at the trustees' discretion. These trusts are commonly used to provide for a spouse during their lifetime, with assets passing to children afterward.
4. Offshore Trusts: Offshore trusts are not tax resident in the UK and have at least one trustee outside the UK. Their treatment for UK tax purposes is different from onshore trusts. Offshore trusts can be excluded property trusts, which means that foreign property is outside the scope of UK inheritance tax. Setting up offshore trusts involves complex legislation, and professional advice, such as that provided by Menzies, is recommended for tax implications, regulatory requirements, and any potential winding up of overseas trusts.
5. Bare Trusts: Bare trusts are the simplest form, where a trustee holds property on behalf of a beneficiary, and the beneficiary is absolutely entitled to the trust's property and income once they reach a certain age. Unlike discretionary trusts, beneficiaries of bare trusts have absolute rights to the trust assets, and the trustee must act in accordance with their instructions. These trusts are commonly used when parents hold bank accounts for their children.
In conclusion, Menzies, with its specialist trust team, is well-equipped to provide guidance and assistance with a wide range of trusts, ensuring that individuals and families can make informed decisions tailored to their specific needs and circ*mstances.
