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3 Types Of Trusts Explained In 3 Minutes

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We recently learnt that a settlor creates a trust by transferring assets to one or more trustees, to be held on trust for one or more beneficiaries. We also learnt the steps necessary to ensure that a trust is validly constituted

Today we are going to examine three of the most common forms of trust. 

1. Bare Trust

Under a “bare” or “simple” trust, a trustee holds legal title to assets on behalf of a beneficiary who has absolute and immediate right to the assets.  The trustee’s role is akin to that of a nominee and the trustee would not typically have any active duties to perform. Bare trusts may be effected orally but are usually created by way of a simple document known as a ‘Declaration of Trust’.

Bare trusts are commonly used to transfer assets to minors who lack legal capacity to deal with those assets.  The trust typically endures until the beneficiary reaches majority, at which stage the assets are transferred to him absolutely.  A bare trust may also be useful in circumstances where an individual wishes to acquire shares without that acquisition becoming a matter of public record.  To maintain confidentiality, legal title to the shares is vested in a trustee to hold on behalf of the true owner.   

Bare trusts are ‘look through’ for tax purposes, and the beneficiary, rather than the trustee, remains liable for any taxes arising.

2. Discretionary Trust

Under a discretionary trust, the trustee may pay or apply income and / or capital of the trust for the benefit of specified beneficiaries in such manner or proportions as the trustee may, in its absolute discretion, decide.  Discretionary beneficiaries do not have an interest in trust assets and may not compel the trustee to exercise its discretion in their favour.

To assist the trustee in the exercise of its discretion under a discretionary trust, the settlor of the trust may provide a “letter of wishes” detailing how he would like the trust assets to be distributed.  However, it should be noted that the letter of wishes is merely a guide and imposes no legal obligation on the trustee to exercise its discretion in a particular manner. 

The tax implications of establishing a discretionary trust can be significant and therefore specialist tax advice should always be obtained.

3. Fixed Interest Trust

Under a fixed interest trust, the trustee has no discretion in the distribution of assets.  Beneficiaries of the trust have a predetermined, fixed interest in a specific portion of the income or capital of the trust.  

A beneficiary may be granted a present entitlement to the income of the trust for a specific period of time, for example, their lifetime.  On the expiration of that ‘limited interest’, the trust assets vest automatically and absolutely in a specified beneficiary, known as the ‘remainderman’.  It is also possible for the settlor to provide for a succession of limited interests before the ultimate vesting of the assets in the remainderman.

Selecting The Right Type Of Trust

It is clear from the foregoing that the suitability of any particular type of trust shall depend on the circumstances and what is sought to be achieved by the creation of a trust structure.  It is not a case of ‘one size fits all’ and it is strongly recommended that specialist advice be sought prior to establishment of any form of trust.

 
Advantages and benefits of Trusts - webinar
 
 
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