Explaining the Different Types of Trusts

When it comes to trusts, there are several different types to choose from. Your individual needs and circumstances will determine which is the most suitable type of trust for you. The following guide gives a brief description of each type and when they would most commonly be used.

Bare Trust

In a bare trust, the beneficiary maintains a full right to the capital and income. This means that as long as the beneficiary is an adult, the trustees in a bare trust have no authority to determine how and at what time money is paid to the beneficiary.

A bare trust is often used by grandparents who wish to make a gift to grandchildren who are not yet adults. The grandparents normally assume the role of the trustees until the child becomes an adult, at which point any investment is transferred into the name of the grandchild.

Discretionary trust

A discretionary trust is sometimes referred to as a pilot trust or a spousal bypass trust. In this type of trust, the beneficiaries do not have the automatic right to benefit, and it is the decision of the trustees as to how, when and to whom any assets or finances are distributed.

A discretionary trust is most often used when the beneficiaries are young children or are disabled. This type of trust is also regularly employed for tax planning purposes and to make provisions for future generations.

Interest in possession Trust

A possession trust is also commonly known as a "life interest trust". Under a possession trust, the beneficiary, who is referred to as the "life tenant" is eligible to receive an income from the trust fund. If the trust contains a property ownership, the life tenant also has the right to live in the property, usually for their remaining lifetime.

When the life tenant's interest ceases, the trust can be dispensed to other beneficiaries. This type of trust is normally used by individuals who are in their second marriage and who want to establish provisions for their new spouse whilst maintaining the ultimate ambition of their assets being passed on to their own children.

A Charitable Trust

For those who want to donate to a charity, rather than making regular payments from an income or a legacy to a national charity, which would provide no control, you could opt to set up a Charitable Trust in your will. Gifts to this type of trust are free of capital gains tax and inheritance tax.

Parental Trusts for Minors

Parental Trusts for children are Trusts that are established for the settlor's unmarried minor children. For tax purposes, the Trust income for the child is treated in the same way as it would be if it were the income of the settlor.

Settlor-Interested Trusts

Settlor-Interested Trusts are those that allow the Settlor's husband, wife or civil partner to benefit from the Trust. They are used in situations such as when a settlor knows that they will be incapacitated and so makes provisions for their future income or an income for their spouse, partner or children through the Trust.

Vulnerable Beneficiaries Trusts

Vulnerable Beneficiaries Trusts are those that are established for a person who is mentally or physically disabled, or for someone who is under 18 years old and has a parent who has died. In a Vulnerable Beneficiaries Trust, the Trustees can claim special treatment for income and capital gains taxes if it is classed as a "Qualifying Trust", which is where the person that creates the Trust doesn't gain any benefit from it.

Our beginners guide to trusts provides further information about setting up a trust and the responsibilities of trustees. If you have a specific question, feel free to take advantage of our free Ask a Solicitor service, or search for you local trust solicitors.