There are a few types of trusts, and each type has its own advantages and disadvantages, which you should discuss thoroughly with Soteria Trusts advisor before setting one up.
The person who sets up a Bare Trust (the Settlor) should be certain that the assets they set aside will go directly to the Beneficiaries they intend to because once the Bare Trust has been established, the Beneficiaries can’t be changed. The Trust assets are held in the Trustee’s name, who administers the trust and has no discretion over what income or capital to pass onto the Beneficiary.
Bare Trusts are commonly used to transfer assets to minors and loved ones on the Settlor’s death. In the case of minors, the Trustee will hold assets until the age stipulated at the outset is reached (18, 21 etc.), at which point the Beneficiary demands the trust assets be transferred to them.
Discretionary trusts are the most flexible type of Trust. The Trustees can choose who among the class of Beneficiaries benefits from the trust assets. None of the Beneficiaries has any fixed rights under a discretionary trust during the trust period, either to income or to capital, so the Trustees are able to adapt to changing family circumstances and tax legislation by exercising their discretion to the best effect. Even the beneficial class can be enlarged by giving the Trustees the power to introduce new Beneficiaries as the need arises.
Uses of Discretionary Trusts
A general discretionary trust may suit you if you have identified a particular group of people you want to pass the benefits but you are unsure which of them, in the future, will need help or in what proportions. For example, as a grandparent, you might like to set aside capital for your grandchildren, including those who may be born later, even after your death. Some of them might be more in need than others, and family and financial circumstances could change from year to year.
Alternatively, you might wish to benefit your children but are aware that some of them are already wealthy and may not wish to be made wealthier by your intended gift. A Discretionary Trust in favour of all your children and grandchildren would allow your children the choice of taking the benefit themselves or passing it on to their children according to their particular circumstances.
You might wish to make a lifetime settlement for the benefit of just your children and grandchildren but are worried that, if you died, your widow(er) might be in further need of capital or income; the Trust funds would not then be available to help. To quell your fear, you could include as Beneficiary ‘my widow(er)’ so that when (and only when) you die, your spouse joins the beneficial class, and the capital and income becomes available for his/her use if required.
Your elderly parent or other dependents could be helped with this type of trust as the subsequent death of that person would not bring the Trust to an end, and so the Trust would continue for the benefit of other class members.
The Interest-in-Possession Trust (sometimes called a ‘fixed-interest or a ‘life interest trust) is a type of trust often used in a Will when a person dies, leaving a surviving spouse. e.g. income to my wife for her life and after her death capital to my children.
The widow can enjoy the income from the assets placed in the Trust (shares, cash, etc., or the use of the family home), but it is prevented from dissipating the Trust capital. This can ensure that the children receive their inheritance. The same Trust can be created in the wills of two people marrying for the second time, each having children by their first marriage. It ensures that the children of the first marriage do not see their parents’ wealth passing to the children of the surviving step-parent.
You might leave your estate to your spouse, in part as an absolute legacy and the remainder in Trust for life. You can give the trustees broad powers to use their discretion over the capital to help in case of need, including the power to make capital advances or interest-free loans to, say, your widow.
You may want to give shares of the family company to your children or grandchildren but fear that they might sell or gift them outside the family. To avoid this, the shares can be held in Trust for, say, ‘my children equally for their respective lives and thereafter for my grandchildren who survive’. By this means, the children and grandchildren benefit from the shareholding but cannot control the shares’ voting power or dispose of them – only the Trustees can do that.
You may be inclined, or be expected, to make regular donations to charity, or you may have a particular interest in some worthy cause. Rather than make regular payments out of taxed income or a legacy to a charity over which you have no control, you could create your own family charity either in your lifetime or on your death by creating a charitable Trust in your will.
Of course, the trust can only be used for charitable objects, i.e. the relief of poverty, the advancement of religion, education or the public good. Charitable Trusts can last forever – a truly lasting memorial.