The following guide to family trusts considers what these are, how they work and when you might consider setting one up, not least in the context of financial planning for the future, both during your lifetime and after you die.

Family Trust – what is it and why would I need one?

A family trust is a way of controlling and protecting family assets including, for example, your family home, together with any other real estate property, savings and investments, either whilst your are still alive or upon your death.

A family trust set up during your lifetime is called an inter vivos or living trust, whilst a trust set up to take effect on death is called a testamentary trust, the latter being detailed in your will and last testament.

In either case, the trust deed will set out how the family trust is to operate, including what benefits can be received, by whom and when.

Family Trust – what is it and what are the different types?

There are many different types of trust that can be used to cater for different circumstances. The main types of family trust are as follows:

The bare trust

The bare trust is the simplest form of trust whereby the beneficiary is absolutely entitled to the trust property once they attain the age of 18, so long as they have the mental capacity to make their own decisions.

Bare trusts are often used to hold investments for children and grandchildren until they reach the age of majority, or to pass on assets upon the death of the settlor where the beneficiaries are still minors.

The discretionary trust

A discretionary trust is one where the trustees have some discretion over how they distribute income and capital from the trust fund, including when and to whom the trust fund is paid out.

The discretionary trust is so called because no beneficiary has a fixed or absolute entitlement to any share in it. As such, the trust can accommodate the birth of additional descendants, so long as they fall into a designated class of beneficiaries.

By way of example, all the settlor’s grandchildren, including unborn grandchildren, can be named as beneficiaries, whereby the trustees provide money to each grandchild as and when the need arises. This could be for tertiary education, getting married or buying a new home.

The interest in possession trust

An interest in possession trust is divided into two classes of beneficiary: income and capital. The income beneficiary has an immediate and automatic entitlement to trust income as it arises, although typically without any rights whatsoever over the capital assets that generate that income.

The capital beneficiary, on the other hand, will receive the entirety of the trust property once the interest in possession trust comes to an end, usually upon the death of the income beneficiary.

These types of trust are commonly used in wills to provide an income for life for a surviving spouse or partner upon the settlor’s death, whilst preserving any capital assets for the settlor’s children at a future date.

An interest in possession trust can also specify that the settlor’s spouse or partner, or any other named beneficiary, can benefit from living in the family home for the remainder of their lifetime.

The accumulation and maintenance trust

The accumulation and maintenance trust is a special kind of family trust intended to make provision for children and young adults up to the age of 25.

This type of trust operates in the first instance as a discretionary trust, whereby the trustees are given discretion over how to use the income for the benefit of the child or young person up to a specified age.

Thereafter, the trust is converted into an interest in possession trust, giving the beneficiaries the automatic right to the trust funds.

The mixed trust

A mixed trust combines the characteristics of different kinds of trusts, typically a combination of discretionary and interest in possession trusts, tailored to suit a particular set of the circumstances.

The accumulation and maintenance trust is an example of a mixed trust, in which the settlor can consider what financial provision they would like to make for their loved ones in the future, and create various different trust mechanisms to meet these goals.

Family Trust – what is it and how do they work?

A family trust is essentially a legal arrangement between three parties, ie; you, as the settlor, together with your appointed trustees and nominated beneficiaries.

Legally speaking, the settlor is the person who establishes the trust, determining who is to benefit (the beneficiaries), and appointing trusted individuals (the trustees) to manage and administer the trust fund.

Having set up a family trust, the settlor essentially gives up legal title to the trust property, transferring such rights to the trustees to manage for the benefit of the beneficiaries in accordance with the terms of the trust.

Typically, a family trust will comprise of various family members, including the settlor in the case of a living trust, together with an independent professional advisor such as a solicitor or accountant.

Typically, trustees do not normally benefit from the trust, but can be specifically named as beneficiaries. Trustees can claim expenses from the trust, whilst professional trustees can claim their professional charges.

Family Trust – what is it and when would I need one?

A family trust can be used in the context of a number of different financial and practical goals, helping you, or your trustees on your behalf, to control exactly when and to what extent the beneficiaries of the trust will benefit.

In particular, a family trust can be set up to address the following different scenarios:

A settlor might want assets to pass to a child, but not until the child has attained a certain age. Under a family trust assets can be retained until the child reaches the age specified in the trust.

A settlor may not want to make set provision for specific beneficiaries upon the settlor’s death, preferring to appoint trustees to exercise their discretion as to when and to whom the trust fund is paid out. In this way, by simply naming a class of beneficiaries, the settlor can cater for a future generation or sibling beneficiaries of different ages.

A settlor might want assets to eventually pass to their children, but also to ensure that their spouse can benefit from those assets, either by way of an income and/or living in the family home, for the rest of his or her life.

A settlor may have several beneficiaries for whom they wish to make financial provision, both during the settlor’s lifetime and upon death. The family trust will allow the settlor to combine the features of different types of trusts to cater for the needs of various family members at different times.

Family Trust – what is it and how do I set one up?

Setting up a family trust is no straightforward matter, requiring careful drafting to reflect your individual requirements and, often, unique family circumstances. Moreover, any failure to set up a trust properly can defeat its entire purpose.

It is always best to seek expert legal advice when considering estate planning or asset protection through a family trust. In this way, your legal adviser can draft the terms of a family trust tailored to suit your needs.

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.


Family Trust - What is it? 1

Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.

Gill is a Multiple Business Owner and the Managing Director of Prof Services - a Marketing Agency for the Professional Services Sector.

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