There are different types of trusts and our short guide explains what each is and how they can be used.

Types of trust

Bare trust

One of the simplest Forms of a trust, this is an arrangement normally used to look after Funds given either in life or under a Will to a child under the age of 18. Once the child reaches the age of 18 they become entitled to look after the assets themselves and the trust comes to an end.

Discretionary trusts

The main characteristic of a discretionary trust is that none of the people who may benefit from the trust has any entitlement to receive anything from the trust. Trustees hold all of the property and money in the trust for a specified group of people and have a wide discretion as to how and when money is paid out to each individual. For inheritance tax purposes any payment to a beneficiary may be subject to an 'exit charge' based on the value that is being transferred out of the trust. On every tenth anniversary of the set up of the trust there may also be a periodic charge on the value of the trust Fund which exceeds the nil rate band at that time. The maximum rate of tax is 6%. The tax rules are complex and professional advice is recommended.

Trusts affected by the Finance act 2006

The Finance Act 2006 changed the way that Accumulation and Maintenance (A&M) and Interest In Possession (IIP) trusts are taxed and as a result these trusts have become less common. Trustees of existing A & M and IIP trusts which contain, or may at some point in the Future contain, assets worth more than the nil rate band should obtain Further legal advice. The taxation of 'old ' A & M and IIP trusts From 6 April 2008 will depend on when the beneficiaries become entitled.

Accumulation and maintenance trust (A&M)

This is a specific type of discretionary trust which was often used to benefit the children or grandchildren of the person creating the trust. The trust is designed to hold assets on behalf of individuals who were under the age of 25 when the trust was created. Each person who is entitled to benefit must be given a right to receive either the capital or the income from their allocated share of the trust assets once they reach the age of 25.

Interest in possession trust (IIP)

This is also known as a life interest trust and is characterised by a specified individual, known as the life tenant, being entitled to either some or all of the income produced by the assets in the trust and/or to the use of trust assets. This could mean that the 'life tenant' is entitled to live in a property owned by the trust for their lifetime. Following the death of the life tenant the trust assets are usually allocated to other individuals, the 'ultimate beneficiaries', who will be named in the trust instrument, or alternatively it could be held on another life interest trust.

Trusts favoured by the finance act 2006

The Finance Act 2006 created a number of new 'tax favoured' trusts. From 6 April 2008 any trust which does not Fall within one of the exceptions detailed in this section will be treated like a discretionary trust For tax purposes.

Immediate post-death interest (IPDI)

An IPDI can only be created by will and is treated as an IIP trust under the old rules for tax purposes. This means that you can make a will leaving your estate upon trust for a named individual, such as your spouse or child, for that individual's lifetime, and that trust will not be taxed like a discretionary trust, but like an IIP trust.

Bereaved minor's trust

Like an IPDI this Form of trust is only set up by will. To qualify it must be created for the benefit of the children of the deceased. Income generated within a bereaved minor's trust can be retained within the trust or paid out For the benefit of the child. All of the capital within a bereaved minor's trust must be paid to the child or children when they reach the age of 18.

Age 18-25 trust 

This is a trust for the benefit of a person under the age of 25 which is established under the will of a deceased parent. It is similar to a bereaved minor's trust but the trustees are not obliged to pay the capital to the children until they are 25. However, there may be an inheritance tax charge on any capital transferred out to the children at any time between the ages of 18 and 25 and when it is paid out at 25.

Disabled trust

A disabled trust is a Form of discretionary trust for the benefit of someone who is physically or mentally disabled. There area number of specific rules and requirements to be met for a trust to qualify as a disabled trust. There are also a number of different types of disabled trusts. Professional advice should therefore be sought when setting up and administering such a trust. (As a trustee you should therefore consider when it would be appropriate to pay out capital to children at 18, giving consideration to the maturity of the child at that point).

About the author

Jennifer Russell Associate Solicitor

Jenny is a solicitor in the Private Wealth team. She advises on estate planning, including the use of wills and trusts. Jenny is a member of The Society of Trust and Estate Practitioners (STEP).