Home Personal Inheritance Tax & Family Trusts What are the Different Types of Family Trust?

What are the Different Types of Family Trust?

A family trust is a legal mechanism by which an individual can financially cater for their loved ones, essentially controlling how their family is to inherit their legacy, either during that individual’s own lifetime or upon their death.

But what are the different types of family trust?

Below we consider family trusts in more detail, including the key benefits and drawbacks of each type.

What is a trust?

In simple terms, a trust is the formal transfer of assets to a small group of trusted individuals, or a trust company, with instructions that they hold those assets for the benefit of others.

The person gifting the assets is known as the settlor, whilst those appointed to look after these assets are known as the trustees. Those that benefit from the trust are the beneficiaries. The trustees are legally obligated to manage the trust in accordance with the settlor’s wishes on behalf of the beneficiaries, even after the settlor’s death.

The details of the arrangement are typically laid out in a trust deed, and the assets placed in what’s commonly referred to as the trust fund.

The distinctive feature of a trust is the separation of legal and beneficial ownership of the assets in the trust fund. Although the trustees are the legal owners of the assets, they must manage those assets solely for the benefit of the beneficiaries, rather than for themselves.

As such, a settlor can be a trustee of a trust, indeed this is fairly commonplace, but they must at all times act in the interests of the beneficiaries.

What is a family trust?

A family trust can comprise of different types of trust, some simple, some more complex, often depending on how and when the benefits of the trust fund are to be distributed, but all in some way for the benefit of the settlor’s loved ones.

As with other types of trust, a family trust can take effect during the lifetime of the settlor or upon their death. It is also open to the settlor when establishing a family trust to determine whether or not the trust should be revocable.

Some trusts, by their very nature, are irrevocable, for example, testamentary trusts that take effect on the death of the settlor usually cannot be altered once the settlor dies. In other cases, the settlor must decide whether to set the terms of the trust in stone or, alternatively, allow for alterations to be made to the trust deed at a future date, including termination of the trust fund altogether.

What are the different types of family trust?

The term “family trust”, encompasses a variety of different types of trusts, each varying in the way that they operate, in particular as to when, how and by whom the trust funds will be received.

The main types of family trust are dealt with in turn below.

Simple trust

The most common type of family trust is the simple or bare trust where assets are held for the beneficiary absolutely until they attain the age of 18. Under this type of trust the beneficiaries have the automatic right to the trust assets, together with any income generated from those assets, once they attain the age of majority.

The simple trust is suitable as a family trust if you want to gift your assets to your children or grandchildren.

However, the bare trust creates a fixed and absolute interest in the trust fund. As such, neither the beneficiaries, nor the share in which they benefit, can be altered once the trust has been established.

Discretionary trust

The discretionary trust is a much more flexible form of family trust. Here trustees are in control of the trust fund, and are able to decide when and to whom to distribute some or all of the assets.

This type of family trust is suitable if you are unable to decide on who will benefit, what they will receive or when they will get it. You will only need to establish a defined class of beneficiaries, for example, all grandchildren. In this way the discretionary trust can cover different generations.

The discretionary trust is so called because no beneficiary has a fixed or absolute entitlement to any share in it, typically leaving the trustees a wide discretion as to the extent to which any benefits are received and by whom.

Although the settlor can provide the trustees with specific guidance on how to manage and administer the trust fund, known as a “Letter of Wishes”, ultimately the settlor will be relinquishing a significant degree of control as to how the trust fund will ultimately benefit their loved ones in the future.

Interest in possession trust

Under the interest in possession trust, typically a single beneficiary will be entitled to receive any income from, or to use property comprised in, the trust fund for a defined period. Thereafter, a different beneficiary, or class of beneficiaries, will become automatically entitled to the capital assets.

This type of family trust is typically used for residential property, whereby you can place the family home in trust for the benefit of your spouse or partner after you die, ensuring they have somewhere to live for the duration of their lifetime, but with your children to ultimately inherit the property itself.

Although the life interest trust can provide your spouse or partner with a stable income and/or home for life, the tax implications can be complex here and professional advice should always be sought.

Accumulation and maintenance trust

The accumulation and maintenance trust is actually a form of discretionary trust, that later transforms itself into an interest in possession trust.

During the trust’s infancy, the trustees are in full control of the trust fund with a discretion as to how to use this fund up until the beneficiaries reach a specified age. At this stage, the beneficiaries acquire the automatic and absolute right to the trust property.

This type of family trust is suitable if you are looking to set up a trust for young grandchildren. The trustees initially remain in sole charge of the trust and are able to allocate the income generated from the fund to the beneficiaries until the beneficiaries reach an age of between 18 to 25 years old.

The accumulation and maintenance is a type of mixed family trust. Indeed, a mixed trust can often be the best way of achieving the desired results when wanting to manage your family’s financial affairs for the future, not least because it allows you to tailor the feature of different trusts to suit your family’s needs.

How should I decide on the right type of family trust?

When deciding what type of family trust to set up you should always seek expert legal advice, not least because your particular set of circumstances may lend itself to more than one type of trust.

“What are the different types of family trust?” is a question best answered in detail by a lawyer specialising in trusts and probate. Moreover, the question of what constitutes the best type of trust for you and your family can only be answered once you have carefully considered all of the options based on your unique case scenario.

Your legal adviser can take you through the benefits and drawbacks of each type of family trust, exploring the different options and how these might work for you, both during your lifetime and upon your death. In this way, you can have the peace of mind that your family will be well looked after once you have gone.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal advice should be sought.

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