What Is A Trust And What Are The Main Types Of Trust

What is a trust?

A trust is a legal arrangement where one person owns an asset but holds it for the benefit of another person. The legal owner of the asset is called the trustee. The person who places the assets into the trust is called the settlor. The person who has the use or benefit of the asset, or receives income from the asset, is called the beneficiary.

Types of trust

Trusts can be categorised by the type of interest that the beneficiary has in the trust property.

Bare trust

In a bare trust, the beneficiary is unconditionally entitled to both any income generated by the asset and to the asset itself (the capital). However, the asset is legally owned by the trustee for the time being.

Interest in possession trust

In an interest in possession trust, the beneficiary has a right to benefit from the asset (usually this involves a right to receive the income, but it can also include the right to use or benefit from the asset) for a period of time but is not entitled to the asset itself. The person who has the right to those benefits for the time being is called the life tenant. When the life tenant’s right to receive the benefits from the trust ends, the trust assets will pass to another person or legal entity.

Discretionary trust

In a discretionary trust, none of the beneficiaries have an automatic right to the income from the trust, and sometimes none of the beneficiaries have an automatic right to the capital. Instead, the trustees have discretion regarding how the income, and sometimes the capital, is used. The trustees usually have a discretion regarding who to make distributions to, the amount to distribute, and when to make distributions.

Please note that the above is a simplification for illustrative purposes only and should not be relied upon without obtaining specialist probate advice that is specific to your circumstances.

Shortlands Law Firm offer expert advice and assistance in relation to inheritance tax. Please contact us on +44 (0)207 629 9905 or email info@shortlands.co.uk if you would like more advice about this complex area of law.