Trusts typically fall into two main categories depending on how the income or benefit is dealt with (dividends, interest, rents, use of property etc.):
• Interest-in-possession trusts: trusts where the income or benefit must be given to the specific beneficiary – it is theirs’ by right. Although there may be more than one beneficiary, they will all have a fixed entitlement.
• Discretionary trusts: benefits are allocated at the trustee’s discretion to any of the beneficiaries. The trustee’s may decide to benefit no one for a time and accumulate the income for future use.
Interest-in-possession trusts – These trusts are also known as ‘fixed interest’ or ‘life interest’ trusts and are often used in Wills when a person dies leaving a surviving spouse to allow their spouse or civil partner to live on the income. This type of trust is common in the Wills of people marrying for the second time, where each spouse has children to their first marriage. It ensures that the spouse is provided for, but the inheritance of the children from the first marriage is also protected.
Discretionary trusts – Trusts which give the trustees the power to make gifts of capital and/or income to a stated class of potential beneficiaries are known as discretionary trusts. Such trust is useful if you have identified a particular group of people you want to benefit, but are unsure which of them will need help in the future, and in what proportions. For example, grandparents may want to benefit their grandchildren, including those born after they pass away.
Alternatively, you may wish to benefit your children but are aware that some of them are already wealthy and may not require your gift. A discretionary trust in favour of your children and grandchildren would allow the trustees to take into account the changing needs of your children and your grandchildren so that the trustees have flexibility to benefit each when there are appropriate circumstances.
Capital advances and income arising from the trust property are distributed entirely at the trustee’s discretion and no one has an ‘interest-in-possession’.
Discretionary trusts can also be created where the trustees discretion is limited to a certain extent. All the rules of the trust i.e., how the property is to be used, how to share out income, and the powers of the trustees are set out in the trust document. This means that the trust can be tailored to suit your aims.
The most favourable characteristic of a discretionary trust is its flexibility. An English discretionary trust can last up to 125 years and income can be accumulated throughout the lifetime of the trust. The class of beneficiaries can also be enlarged by giving the trustees the power to introduce new beneficiaries as the need arises.
Discretionary Will trusts
– Just as discretionary trusts can be created to commence in lifetime, they can also be a feature of a Will, becoming effective only on death.
You may give a portion of your estate to a separate discretionary trust for the benefit of selected individuals. Alternatively, you may prefer that your executors decide how the whole of your estate is to be dealt with in the light of the tax and domestic circumstances existing at the time of your death.
Charitable Will trusts – You may make regular donations to charity or you may have a particular interest in a certain cause. Rather than make regular payments out of income or a legacy to a national charity over which you have no control, you could create your own charity, either in your lifetime or on your death, by creating a charitable trust in your Will. Gifts to such a trust are free of capital gains tax but can only be used for charitable objects.
Vulnerable person trusts – It is possible to set up special trusts for the benefit of disabled beneficiaries. Although these can be discretionary or interest-in-possession trusts, during the lifetime of the disabled beneficiary, special tax rules apply so that it is possible for the trust assets, income and gains to be taxed as if the beneficiary owned them.