What are the different types of trust?
There are many different types of trust you can create to support a range of estate planning solutions, which can be overwhelming to look through if you have no experience in trust planning. That makes the support of a trust solicitor helpful in determining the right trust for your situation, ensuring it acts in the way you anticipated to best support your beneficiaries in their lives.
For instance, are you looking for a trust that runs indefinitely (a lifetime trust), or one that activates at a certain point in time (e.g. when one of your children turns 18)? It is important to establish time conditions within your trust so your trustees can support your beneficiaries per your wishes.
One type of trust is an express trust, which is where the settlor establishes or creates the trust. However, there are examples of trusts that can be imposed by law, including:
- A statutory trust, which is created by operation of law to be held by trustees before it is sold (either immediately or at the trustees’ discretion)
- A resulting trust, which can be created by operation of law where one person involved may have acquired an interest by contributions
- A constructive trust, which can be created by operation of law to benefit someone who may have been deprived of their rights due to another party holding a legal property they obtained through ‘unjust enrichment’, interference or breaching their fiduciary duty
Other trust types depend on the features and elements they present:
- A protective trust is one where the settlor is also a beneficiary, while a qualifying trust is one where they are not
- A revocable trust is one that the settlor retains control of and can change the details at any time, while an irrevocable trust is when the Trust Deed cannot be altered once it is established
We have outlined the main types of express trust below, but this is not an exhaustive list of all available options:
A bare, simple or absolute trust is the most basic type of trust, often used to pass assets to young children when they reach the age of 18 in England and Wales (16 in Scotland). The trustee takes care of the assets on behalf of the beneficiaries, who are then able to access the income and capital within them as soon as they reach adulthood. In typical cases, a beneficiary can’t be changed once a bare trust is set up, and the trustee will not perform any active duty.
An interest in possession or life interest trust is where a beneficiary is entitled to the income/benefit of the trust, minus any expenses. An example would be to place your shares in a company in a trust, and when you pass away the income from these shares is divided between your children. These trusts can be used to ensure a loved one retains a steady stream of income when you pass away, to keep your estate with your family or to cover the cost of care home fees.
A discretionary trust is when a trustee will make the decisions about how to use the trust income and capital. These decisions may include what gets paid out of the trust, what beneficiary is paid, how often payments are made and any conditions the beneficiaries must fulfil to access the trust. These types of trust could be used to support beneficiaries that aren’t able or responsible enough to look after the assets, or if a beneficiary presents a more pressing need for the assets at a later date.
An accumulation trust is where a trustee can accumulate the income created by a trust and add it to the trust’s capital instead. They may also be able to pay income out to beneficiaries as well.
A mixed or hybrid trust is one that incorporates several characteristics of other trusts into one. For example, some of the assets might be held under an interest in possession trust, while others fall under the terms of a discretionary trust. This means that each distinct element of the trust is treated according to the tax rules that apply to that segment.
A settlor-interested trust is where the settlor is also the beneficiary of the trust. These are used when the settlor feels they might require financial support in the future. For example, if you are no longer able to work due to illness, you might create a trust you can access in later life to support your living expenses.
A non-resident trust is where the trustees are not resident in the UK, usually for tax purposes. The tax regulations related to this type of trust are especially complicated, so we would advise you don’t pursue one without clear guidance from an experienced trust solicitor.
A charitable purpose trust is one that is created for a charitable purpose. These purposes can be the relief of poverty, the advancement of education, the advancement of religion or something else that is beneficial to the community. These types of trust often have the lowest tax bands associated with them.
A non-charitable purpose trust is where the beneficiary of the trust doesn’t fall under any of the four reasons listed above, but they are not necessarily an ascertainable individual. An example of this type of trust would be one created to support the maintenance of a tomb or to care for the settlor’s animals.
It is important to note here that these different trust types can often overlap when setting up your own trust, confusing the picture even further. In addition, different trusts are subject to different tax regulations. Again, working with a professional trust solicitor helps clear up the situation and establish the right type of trust for your situation.
What is a Property Trust Will?
You can set up a Property Trust Will in order to hold your share in the property you own at the time of your passing in a trust for your children and other beneficiaries, while your surviving partner can continue to live in the property for the remainder of their lifetime.
An advantage of a Property Trust Will is that, even if your partner chooses to remarry or enter a civil partnership following your death, the value of your shares of your property is protected for your beneficiaries to claim when the conditions you set are fulfilled.