Types of Trusts

There are a number of types of trust available:

Discretionary Trusts

Under a Discretionary Trust potential beneficiaries have no right to income or capital. They are therefore very attractive to a settlor where there is a desire to retain the maximum flexibility for their children or even unborn grandchildren and other classes of beneficiaries. Consequently, the Trustees are not obliged to distribute income, which, subject to the accumulation period of say, 21 years, can be reinvested within the Trust.

Interest in Possession Trusts

An Interest in Possession Trust is one where a settlor knows who he wants to benefit and the current person to benefit is known as the Life Tenant.  The Life Tenant is entitled to the income as and when it arises from the Trust assets or the enjoyment of occupying a property held in Trust rent free for the rest of their life or lives. The Trustees are often given specific power to advance capital to the Life Tenant at their discretion. On the death of the Life Tenant the Trust capital would generally pass absolutely to the ultimate beneficiaries, known as the Remaindermen, specified under the Trust.

It is not unusual for a spouse to leave their assets in Trust in order for the surviving spouse to enjoy the income with the capital passing to the children on the death of the surviving spouse. From an investment point of view, the Trustees have to provide a balance of income and capital growth between the types of beneficiary as they are Trustees for the current Life Tenant and ultimately the Remaindermen.

Accumulation of Maintenance Trusts

This is a special form of Discretionary Trust which, in order to qualify, one or more of the beneficiaries must become entitled to the Trust income by the age of 25. Prior to reaching a specified age, interest must be accumulated or utilised for the maintenance, education or benefit of one or more beneficiaries. Capital can be advanced by Trustees at their discretion.

Absolute or Bare Trusts

This type of Trust is where the beneficiary has an absolute interest to both capital and income, which cannot be taken away. At any time over the age of 18 the beneficiary can legally insist on the assets being transferred into his name. If a child dies beforehand, the Trust fund forms part of their estate.

Life Policy Flexible or Power of Appointment Trusts

Although these Trusts are flexible in nature and they provide Trustees with the power to appoint the Trust assets among a group of beneficiaries, the majority of Life Policy Trusts are of the Interest in Possession type. There are usually two categories of classes of beneficiaries, actual and potential. It should be borne in mind that the standard documentation provided by Life Offices is essentially designed to hold non-income producing assets.

For more advice and assistance on this topic please call us on (01225) 785520 or send us an email.

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