The Different Trusts Available

There are a number of different sorts of Trusts, however, they usually fall in to one of the following categories:

• ​Bare Trusts
• Interest in Possession Trusts
• Discretionary Trusts
• Accumulation and Maintenance Trusts
• Mixed Trusts

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What is a Bare Trust?

A Bare Trust, also known as a 'Simple Trust', is one on which each beneficiary has an immediate and absolute right to both capital and income.  The beneficiaries of a Bare Trust have the right tp take actual possession of Trust property.

The property is held in the name of a Trustee, but that Trustee has no discretion over what income to pay the beneficiary.  In effect, the Trustee is a nominess in whose name the property is held and has no active duties to perform.

Example:

Graham leaves his sister Julie some money in his Will.  The money is to be held in Trust, with Julie entitled to the money and any income, such as any interest it earns.  She also has a right to take possession of any of the money at any time.

This is a Bare Trust because Julie is absolutely entitled to both capital (the ordinary momney settled in the Trust) and the income (any interest earned).

What is a Discretionary Trust?

Trustees of a Discretionary Trust generally have 'disctretion' about how to use the income of the Trust.  They may be required to use any income for the benefit of particular beneficiaries, though the Trustees can decide:

• ​How much is paid
• To which beneficiary or class of beneficiaries payments are made
• How often the payments are made
• What, if any, conditions to impose on the recipients

​What is an Interest in Possession Trust?

This type of Trust exists when a beneficiary, known in this case as an 'Income Beneficiary', has the current legal right to the income from the Trust as it arises.  The Trustees must pass all of the income received, less any Trustees' expenses and Tax to the beneficiary.

A beneficiary who is entitled to the income of the Trust for life, is known as a 'Life Tenant' (a 'Liferenter' in Scotland) or as having a 'Life Interest' (a 'Liferent Interest' in Scotland).

The income beneficiary need not, and often does not, have any rights over the capital of such a Trust.  Normally, the capital will pass to a different beneficiary., or beneficiaries, at a specific future event.  Depending in the terms of the Trust, the Trustees might have the power to pay capital to a beneficiary even though that beneficaiary only has a right to receive income.

A beneficiary who is entitled to the Trust capital is known as the 'Remainderman' (Fiar' in Scotland) or the 'Capital Beneficiary'.

Example

Stephen is married to Karen.  On his death, Stephen's Will creates a Trust and the the shares he owned are to be held in that Trust.  The dividends earned on the shares are to go to Karen ofr the restof her life, and when she dies the shares pass to the children or grandchildren.  Karen has an Interest in Possession in the Trust as she is entitled to the income (the dividends) arising on it for the rest of her life.  Unlike Juliet in the Bare Trust example, Karen has no right to the capital, so when she dies, the Trust ceases and all the capital (the shares) passes to her children or grandchildren (the Remainderman or Fiars).

The Trustees may, or may not, be allowed to accumulate income within the Trust for as long as the law allows rather than pass it to the beneficiaries.  Income that has been accumulated becomes part of the capital of the Trust.

The Trustees can decide how to invest or use the money and any interest it earns to benefit the Grandchildren.  So, when the children are young, the Trustees might decide to pay for music lessons ofr them.  As they get older, the Trustees might pay towards a wedding.  After a specified number of years, the Trustees wind up the Trust and distribure all of the money to the children.

What is an 'Accumulation and Maintenance Trust'?

An Accumulation and Maintenance Trust is one in which the beneficiaries will become entitled to the property, or at least the income when they reach a certain age (no more than 25).  The Trustees can use the income for the maintenance of the beneficiary before the date on which that beneficiary becomes entitled to the property or to an interest in possession in that property.

Trustees of an Accumulation and Maintenance Trust are given power to 'accumulate' the income of the Trust until a certain date, at which time the beneficiary, or beneficiaries, are entitleed to the property of the Trust or to the income arising from that property.

In England and Wales, the beneficiary (unless the terms to the Trust say otherwise) becomes entitled to the income from the property held in the Trust when he or she reaches age 18 and an Interest in Possession Trust is created at that point.

The position in Scotland is different, as there is no equivalent entitlement to the income of the Trust at age 18.  However, Scottish Law limits accumulation periods so Accumulation and Maintenance Trusts will often end when the beneficiaries reach the age of majority.

Example

James puts money into an Accumulation and Maintenance Trust for the benefit of his grandson Andrew.

The Trustees can make payments to Andrew from the Trust for his maintenance and will accumulate any remaining income.  The terms of the Trust give Andrew the capital and any accumulated income at the age of 25.  So, on his 25th birthday, Andrew is entitled to all the money at that date.

What is a 'Mixed Trust'?

A Mixed Trust is a mixtureof more than one type of Trust, for example:

- an Interest in Possession Trust and a Discretionary Trust, or

- an Interest in Possession Trust and an Accumulation and Maintenance Trust

Example

Two children benefit from an English Accumulation and Maintenance Trust.  Zoe reaches age 18 while Sarah is still just 14 years old.

The part of the Trust benefiting Zoe becomes an Interest in Possession Trust while the part that benefits Sarah remains an Accumulation and Maintenance Trust until she reaches age 18.  So, when Zoe reaches 18 the Trust becomes a Mixted Trust.

What is a 'Settlor-interested Trust'?

There are special Tax rules for Trusts in which the Settlor 'retains an interest' in the Trust, for example, where the Settlor receives income from the Trust, but these are too specialised to be included in this.  Our professional advisers will be able to provide you with more information about them.