A trust is a legal arrangement for managing assets such as cash, property, shares and land. In a trust, these assets are held and managed by the trustee for the benefit of another party. There are many different types of trust, each set up for a range of reasons. Here we are exploring the different types of trusts UK individuals can take advantage of, explaining how each of them works and what they are used for.
Trusts are used to protect and control family assets. Placing assets in trust may minimise estate and Inheritance Tax liabilities. It could be a way to provide for a spouse whilst assets are ultimately passed on to the children. Some are used to manage assets on behalf of a child or someone who is incapacitated, whilst others can protect against detrimental spending.
What are the different types of trusts?
Once they fully understand your situation and are clear on your objectives, an estate planner will be able to determine which type of trust will best suit your needs.
The following are some of the most popular types of trust:
Bare trusts
A bare trust is the simplest type of trust, used to give all assets to the beneficiary providing they are at least 18 years of age.
Whilst assets in a bare trust are held in the name of a trustee, the beneficiary has the right to the contents of the trust at any time. This type of trust is mostly used to pass assets on to young people, with the trustee taking care of them until the beneficiary is old enough. Bare trusts are commonly used as education trusts for children, especially when funds are intended for school fees or university costs.
Interest in possession trusts
With an interest in possession trust, the beneficiary can receive income straight away, although they cannot have control over the assets that provide the income. Income Tax is payable on the proceeds received. This type of trust can be used to pass income from, for example, shares, to a widowed spouse, whilst preserving the shares themselves to pass on to the children when the parent dies.
Discretionary trusts
With a discretionary trust, the trustees have total control over the assets and the income that comes from them, including deciding when and how to pass them on to the beneficiaries. These types of trusts are often set up to put assets aside for a future need, such as a grandchild’s education. They are also used in circumstances where beneficiaries are not capable or responsible enough to manage money themselves. These trusts are also popular for asset protection, helping to safeguard funds against financial instability or family disputes.
Mixed trusts
These trusts combine elements for different types of trusts. For example, it could provide the beneficiary with a right to income of a proportion of a trust fund.
Vulnerable person trusts
Some trusts for children or disabled persons receive special tax treatment. These are referred to as ‘trusts for vulnerable beneficiaries’. A vulnerable beneficiary is either someone under the age of 18 whose parent has died, or a disabled person who is eligible for certain benefits. They may also be someone who is unable to manage their own affairs because of a mental health condition.
Non-resident trusts
A non-resident trust is usually used if none of the trustees are resident in the UK for tax purposes; where only some of the trustees are resident in the UK and the settlor of the trust (the person who decides how the assets in the trust should be used) was not resident, not normally resident or domiciled in the UK at the time of setting up the trust.
Accumulation trusts
This type of trust allows trustees to accumulate income within the trust and add it to the trust’s capital. They may also be able to pay out income, as you can with discretionary trusts.
Settlor interested trusts
Settlor interested trusts allow the settlor or their spouse or civil partner to benefit from the trust. The trust in this case could be an interest in possession trust, a discretionary trust or an accumulation trust.
Choosing the right types of trusts for your individual situation
As we have ascertained, there are many different types of trusts. As Surrey estate planning specialists, Partridge Muir and & Warren are able to select the most appropriate trust to suit your individual circumstances and goals.
To learn more about the different types of trusts and how they could benefit your particular situation, you are welcome to get in touch.