What are the different types of trusts?
In the UK trusts are legal arrangements that involve transferring assets to trustees to hold and manage on behalf of beneficiaries. Trusts can be broadly categorised in various ways, but some of the most common types are outlined below.
Revocable & Irrevocable Trusts
Revocable trusts: These can be altered or cancelled by the settlor (the person creating the trust) at any time during their lifetime. They offer flexibility but generally don’t provide the same level of asset protection or tax benefits as irrevocable trusts.
Irrevocable trusts: Once established, these trusts cannot be easily modified or revoked without the beneficiaries’ consent or court approval. They offer strong asset protection and potential tax advantages but require careful planning due to the relinquishment of control over the assets.
Living Trusts & Will Trusts
Living trusts (also known as inter vivos trusts): These are created and become effective during the settlor’s lifetime. They are popular for avoiding probate, managing assets during incapacity, and offering greater privacy than wills.
Will trusts (also known as testamentary trusts): These are established through a will and only take effect after the settlor’s death. They can be used to manage assets for beneficiaries, especially minors or vulnerable individuals, but they are subject to probate.
Trusts with specific purposes
- Bare Trusts: These are the simplest form of trust, where assets are held by trustees for the beneficiary who has the absolute right to both the capital and income. They are often used for gifting to minors.
- Discretionary Trusts: Trustees have full discretion over how and when to distribute trust income and capital to a class of beneficiaries. They offer flexibility and can be useful for beneficiaries with varying needs or who are not responsible with finances.
- Interest in Possession Trusts: These trusts grant a specific beneficiary (the life tenant) the right to receive income from the trust assets or use trust property during their lifetime. After their death, the assets pass to other beneficiaries.
- Trusts for Vulnerable People (or Disabled Persons Trusts): These are set up to benefit individuals with disabilities or who are otherwise vulnerable, often with favourable tax treatment to ensure their needs are met without jeopardising their access to state benefits.
- Protective Trusts: These can be structured as discretionary or interest in possession trusts but include provisions to protect assets from external threats such as creditors or legal claims.
- Charitable Trusts: Established to benefit charitable organisations, these trusts often benefit from significant tax relief.
Hybrid or mixed trusts
Mixed Trusts combine features of different types of trusts to address complex needs and situations. For example, a mixed trust might include elements of a discretionary trust and an interest in possession trust.
Choosing the right trust
The best trust for your situation depends on your specific goals and circumstances, such as:
- Your primary objectives: This could include asset protection, tax optimisation, providing for minors, supporting a vulnerable individual, or managing a family business.
- Beneficiary needs and circumstances: For example, age, financial responsibility, health, and potential future needs.
- Level of control desired: Do you want to retain control over the assets or relinquish it to trustees?
- Tax implications: Different trusts have different tax treatments, so consider how they will impact inheritance tax, income tax, and capital gains tax.
- Complexity and cost: The complexity of setting up and managing a trust can vary significantly, which impacts the associated costs.
It is recommended to seek professional advice from a qualified solicitor to discuss your individual needs and determine the most suitable type of trust for your specific situation. They can guide you through the process of drafting the trust deed, appointing trustees, transferring assets, and ensuring the trust complies with all legal requirements and achieves your desired outcomes.