What is a trust?
A trust is a legal arrangement where one or more 'trustees' are made legally responsible for holding assets. The assets - such as land, money, buildings, shares or even antiques - are placed in trust for the benefit of one or more 'beneficiaries'
The trustees are responsible for managing the trust and carrying out the wishes of the person who has put the assets into trust (the 'settlor'). The settlor's wishes for the trust are usually written in their will or set out in a legal document called 'the trust deed.'
What trusts are for
Trusts are set up for a number of reasons, including:
- to control and protect family assets
- when someone’s too young to handle their affairs
- when someone can’t handle their affairs because they’re incapacitated
- to pass on assets while you’re still alive
- to pass on assets when you die (a ‘will trust’)
- under inheritance rules if someone dies without a will (in England and Wales)
The Types of Trusts
Bare trusts
Assets in a bare trust are held in the name of a trustee. However, the beneficiary has the right to all of the capital and income of the trust at any time if they’re 18 or over (in England and Wales), or 16 or over (in Scotland). This means the assets set aside by the settlor will always go directly to the intended beneficiary.
Bare trusts are often used to pass assets to young people - the trustees look after them until the beneficiary is old enough.
Interest in possession trusts
These are trusts where the trustee must pass on all trust income to the beneficiary as it arises (less any expenses).
Stanley’s wife is the income beneficiary and has an ‘interest in possession’ in the trust. She doesn’t have a right to the shares themselves.
Discretionary trusts
These are where the trustees can make certain decisions about how to use the trust income, and sometimes the capital.
Depending on the trust deed, trustees can decide:
- what gets paid out (income or capital)
- which beneficiary to make payments to
- how often payments are made
- any conditions to impose on the beneficiaries
Discretionary trusts are sometimes set up to put assets aside for:
- a future need, like a grandchild who may need more financial help than other beneficiaries at some point in their life
- beneficiaries who aren’t capable or responsible enough to deal with money themselves
Accumulation trusts
This is where the trustees can accumulate income within the trust and add it to the trust’s capital. They may also be able to pay income out, as with discretionary trusts.
Mixed trusts
These are a combination of more than one type of trust. The different parts of the trust are treated according to the tax rules that apply to each part.
Settlor-interested trusts
These are where the settlor or their spouse or civil partner benefits from the trust. The trust could be:
- an interest in possession trust
- an accumulation trust
- a discretionary trust