Most common type of trusts in the UK explained

The Most Common Types of Trusts in the UK Explained

Trusts

A trust is a specific kind of legal arrangement that’s often used to manage assets, whether this be money, investments or land. Trusts can be set up for a wide range of reasons, including protecting family assets, helping someone who’s too young to handle their own affairs, or even to pass on money or property while you are still alive.

Trusts are commonly used in estate planning. They can be used to pass on money and assets in accordance with your will – it’s fairly common for people to place some assets in trust before they die. They can also be used to reduce the estate’s liability to inheritance tax, and to help speed up the probate process – as assets in trust can be distributed according to the terms of the trust before the grant of probate is received. Trusts are also often used as a way to pass money on to young people and keep the money safe until they turn 18.

In this article, we’ll give you a quick run-down of some of the most common types of trust that you might encounter, as well as why each one is used.

Every trust is different

Before we move on, however, it’s worth pointing out that trusts can be very different from each other. Even those that are in the same type or category can be extremely different, as the way a trust is managed and run will depend on how it is set up. Trusts can be established with a huge variety of different conditions for a variety of purposes.

Types of trusts

We’re going to cover 3 different types of trust in this article: bare, interest in possession and discretionary.

Bare trusts

Sometimes known as simple or absolute trusts, this type of trust means that assets are held in the name of a trustee, but the beneficiary (the person who receives the assets) has the right to all of the capital and income. The beneficiary can access the assets in trust at any point if they’re 18 or over in England and Wales, or 16 or over in Scotland.

Trusts like this are often used to pass assets to young people, as the trustees look after them until the beneficiary is old enough. For example, you could leave your child some money in your will, which would then be held in trust and invested or kept according to your wishes. Your child could then take possession of the money at any time after they turned 18, or 16 in Scotland.

Interest in possession trusts

With an interest in possession trust, the beneficiary has the rights only to any income generated from the assets in trust, minus any expenses incurred. The beneficiary doesn’t have any rights to the assets themselves.

For example, you could create a trust for either property or shares that you owned. You could then create a trust to hold those assets, and put in the terms of the trust that the income from the assets would go to your partner. You could also then say that the assets would pass to your children when your partner dies.

Discretionary trust

With a discretionary trust, the trustees themselves can make decisions about how to use the income from the trust. Trustees can decide what gets paid out, which beneficiary to make payments to, and how often payments are made.

This sort of trust could be used, for example, to leave money to all of your grandchildren, but to leave it up to your trustees (which could be your family) to decide who gets what according to who has the greatest financial need. It’s a way to give your beneficiaries or trustees more flexibility to control what the trust does and how your inheritance can be shared out.

Trusts are an extremely complicated part of estate planning, and there are a huge amount of possibilities and legal consequences of each one. Always speak to a professional estate planner before setting up any trust.