What are the two main types of Trusts?

31st July 2023

Trusts are a great way to be able to pass assets out of your estate while still being able to maintain an element of control. These structures have been overlooked recently due to bad press regarding how expensive and difficult they are to maintain. There is a benefit in settling assets into a trust instead of giving it away to a person who, may or may not, have enough life experience to look after and maintain the gift they have received. Trusts can control and dictate the benefit to the beneficiary while the Settlor can start the 7 year IHT clock for that value being removed from your estate.

As you may expect, there are a number of additional administration points that will need to be considered if this option is followed to ensure no unexpected tax charges arise as a result. In the coming articles, I will look at some of the key areas which can trip up clients if and when assets are settled into a trust.

What sort of trust?

There are two main types of trusts – Interest in possession and Discretionary. Either being created now, while you are still alive (so not in your Will as that’s a whole other article!) or on death via a clause in your will or per the rules of intestacy. One of the main differences between these two types of trusts is how the income is distributed. All other aspects of taxation are the same – Inheritance tax, capital gains tax, Stamp Duty etc are the same in both types of trusts.

Which sort of trust to use can be easily answered using the following questions – do you trust the beneficiaries with the income produced from the assets held in trust or not? If yes, then Interest in Possession might be the right trust for you as the beneficiary has an absolute right to income and this can be received directly avoiding any additional reporting requirements needed for the trust. If no, then Discretionary is the best option as the Trustees (those managing the assets) have absolute discretion as to when and how much income is distributed. The beneficiary does not have a right to the income produced, and so is protected from any ‘adventures’ of the beneficiary. This comes with an income tax cost which is explained further in a subsequent article.

Trusts are an invaluable asset protection tool and can help to ensure your estate is managed in the way that you planned it. Especially when expert advice is sought, trusts give you extensive control over who will benefit from your generosity long after your lifetime. Seeking out professional advice at the time is essential to avoiding any potential snags in the future and it will let you rest easy knowing that everything is organised to the highest standards. At Thompson Jenner, our team can guide you through all aspects of trusts so that you can create a plan for protecting your assets for generations to come. So get in touch today and let us help make the process smooth, straightforward, and worry-free – Probate and Estate Administration team.

Other articles in this series:

Income Tax implications: The two main types of trusts

What do I need to consider to set up a trust?

Inheritance tax implications for a relevant property trust

What to do when a trust is wound up

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Paul Carnell

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