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 A trust is a mechanism whereby property or cash or other assets are held by individuals known as the Trustees for the benefit of other individuals known as beneficiaries. There are several kinds of trusts and the characteristics of each of these kinds will dictate which kind of trust is most appropriate in any circumstance.
Firstly there is a Bare Trust. This is a straightforward arrangement where someone (the trustee) holds something on behalf of another (the beneficiary). There are no conditions attached to this arrangement and the beneficiary is free to obtain the asset at any time.
Secondly there is what is known as an Interest in Possession Trust. This will most likely be in the form of a Liferent Trust. In this arrangement the trustee holds assets for the benefit of the beneficiary but the beneficiary has the use of these assets for a predetermined time.
This is usually the life of the beneficiary but can be restricted to other events (such as remarriage). The trust deed sets out that when the liferent interest comes to an end the trust assets should be passed on to other beneficiaries. This kind of arrangement is popular where there are children of a first marriage or where it is felt that the liferent beneficiary should be “protected” from receiving the trust assets directly.
The next kind of trust is known as an Accumulation and Maintenance Trust. Prior to the 2006 Budget (on 22nd March 2006) this was typically set up by parents or grandparents where assets were transferred to trustees to administer these on behalf of children. The trustees were to pass over the items at a predetermined age (known as the vesting date) but prior to this the trustees could use capital and/or income for the benefit of the young beneficiaries. This was popular in giving the beneficiaries access to funds but no outright entitlement until the vesting age was reached. Typically this could be set at 25.
A further arrangement is known as a Discretionary Trust. This is where assets are passed to trustees to hold these for a group of named beneficiaries but no one beneficiary is entitled to anything from the trust as of right but instead the full discretion lies with the trustees.
There are tax consequences of all of these trusts and certainly following the Budget the popularity of accumulation and maintenance trusts is likely to be much diminished and we feel that discretionary trusts will become much more common. There are, however, tax implications to trusts so that a high rate of income tax will apply and where the discretionary regime is in place there is the potential to lifetime inheritance tax arising every ten years and on each occasion capital leaves the trust. We can, however, explain all these intricacies to you and whilst they might sound onerous it is useful to remember that the amount of tax that will arise on a trust on an ongoing basis is likely to be a fraction that would arise on the same assets were they included in someone’s estate on death.
For advice on all aspects of private client work contact
Kieran Fitzpatrick or Elspeth Williamson.
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