A trust will typically be created in order to protect beneficiaries who may not be able properly to look after assets themselves e.g. because of their age or mental incapacity.
Trusts can also be created for tax-planning reasons. The most usual types of trusts which can be created are listed below:
This type of trust is not, strictly speaking, a trust at all. It arises where an asset is held in the names of trustees but the trustees only nominally own the assets within the trust – the real owners are the beneficiaries. Such trusts arise commonly when children are entitled to assets but they are not old enough to have legal authority to deal with those assets.
Interest in Possession Trust
Under this type of trust a person (normally known as a tenant for life) is entitled to the income from the trust but is not entitled to the capital. Such a trust might arise when, say, one spouse dies and wishes to leave sufficient funds to the surviving spouse for the rest of his or her life, but at the same time wishes to ensure that the surviving spouse cannot dispose of the capital assets.
The trustees of a discretionary trust have, as might be supposed, a discretion as to how they treat the assets within the trust. This discretion will apply both to capital and income in the trust. Although the trustees will have an absolute discretion, the person creating the trust will stipulate the people or charities in respect of which the discretion may be exercised. If a settlor is concerned about the way in which trustees can exercise their discretion then, in the case of a lifetime trust the settlor can be a trustee himself. In all trusts the settlor can also sign a letter of wishes, which gives non-binding instructions to trustees as to how the settlor would wish their discretion to be exercised in the future.
Trusts which are often included in wills are “Nil Rate Band Discretionary Trusts”. See our comments under the heading “Estate Planning” in this connection.
Tax consequences of Trusts
People are frequently faced with the dilemma of providing for a spouse or a partner during that spouse’s or partner’s lifetime but wanting to ensure that what they leave on death will eventually be inherited by their children.
Such a trust gives the spouse or a partner a right to income from the capital but not the capital itself. The capital is eventually passed on to the children following the death of the spouse or partner.
It is possible to incorporate within a Trust an element of discretion. The trustees have the discretion but not an obligation, to use part of the capital for the benefit of the spouse of partner if the trustees so decide.
As the spouse or partner merely has the right to the income from the capital, the capital is protected and is not available as such for the payment of residential or nursing home fees of the surviving spouse or partner.
Such a trust however does have inheritance tax consequences depending upon the size of the trust and the value of the assets of the surviving spouse or partner on his or her death.