If you are considering tax planning and trusts, it is important to know your options. Here our wills and probate solicitors list the various types of trusts and explain the differences between each.
What is a Trust?
To learn the basics, read our blog post ‘Why Should I Set Up a Trust?’
The Types of Trust
Bare trusts provide for assets to be held in the name of trustees, albeit that the beneficiary has a right to the capital and income at any time assuming that they are over 18 years of age and live in England or Wales.
These trusts are commonly used to pass assets on to young people when they reach their majority.
Interest in Possession Trusts
These are also known as Life Interest Trusts or IIPs and are often useful in the following circumstances:
A will may provide for a spouse to be provided with a right to the income of an estate with the children to receive the estate following the death of the surviving spouse. This means that, for the remainder of the spouse’s life, they will be entitled to all income generated by the estate and this could include; dividends, bank or investment income, or a rent from property or the ability to reside in it.
They have an interest in possession in the income but not the capital itself - hence them often being described as a ‘life tenant’. Upon the death of the surviving spouse the assets in the trust will be passed on to the capital beneficiaries and the trust will cease to exist.
This trust works slightly differently in that a trustee must pass on all trust income to the beneficiary as it arises and it will be will be subject to tax according to the life tenant’s personal income tax rate.
Discretionary trusts are managed by trustees who are required to make decisions about both trust income and capital. The trustees will be charged with making decisions concerning provision and distribution from the trust including how often payments are made, the amounts of any payments and the identity of the beneficiary.
This type of trust is typically used for future needs or for beneficiaries who aren’t able to deal with the management of any provision themselves, for any reason.
Accumulation trusts do exactly what their name suggests in that the trustees can accumulate income and add it to the trust capital.
This is where a number of different types of trusts are combined.
Settlor-interested trusts allow a spouse or civil partner to benefit from the trust through an interest in possession, accumulation or discretionary format.
This trust should be used for tax purposes if the trustees are not UK based.
Creating a Trust
If you are interested in setting up a trust, or would simply like to learn more about Wills, tax planning and trusts, speak to one of our friendly solicitors.
Call 0808 178 2773 to speak to a member of the team today.