Affinity Consulting Group

Trusts

Home : Sitemap : Legal Information 
| | | | | | | |
Affinity Consulting Group

 

Types of Trust

Discretionary Trust

  • The most flexible trust and most commonly used in offshore structures
  • Trustees have wide discretion in the trust deed to administer the assets and to either accumulate or distribute them to any one or more of the Beneficiaries, even to the exclusion of others, as the Trustees, in their absolute discretion, think fit.
  • The assets are not held for specific beneficiaries in specific proportions
  • Trustees can be guided by a letter or memo of wishes setting out the settlor‘s intentions.

Strict Trust

  • A Strict Trust affords the Trustee little discretion in the exercise of his duties.
  • The Deed will stipulate how the assets are to be managed and when and in what proportion the capital and income is to be distributed to the Beneficiaries.

Accumulation and Maintenance

  • The tax treatment for this type of trust is particularly favorable.
  • The following conditions must all be satisfied if the trust is to qualify as an accumulation and maintenance trust (Section 71 Inheritance Tax Act 1984):-
    (a) That one or more persons will on before attaining 25, become beneficially entitled to the settled property or an interest in possession therein.
    (b) That no interest in possession subsists in the settled property and the income is to be accumulated if not applied for the maintenance, education or benefit of a beneficiary.
    (c) That either (i) not more than 25 years have elapsed since the commencement of the settlement; or (ii) all the beneficiaries were grandchildren of a common grandparent or children or widows or widowers of such grandchildren who died before becoming entitled.
  • These trusts are commonly used for the benefit of children or grandchildren of the settlor aged under 25. The income may be used for their maintenance during the childhood if required but must become their income as of right not later than age 25. Capital can be advanced at any time but any entitlement to capital to be postponed to a later age or indefinitely.
  • It is possible to retain a reasonable flexibility within the framework of the statutory provisions.

Interest In Possession

  • There are settlements where, in contrast to the discretionary settlement and accumulation and maintenance settlement, one or more individuals are absolutely entitled to receive the income from the settled property immediately upon the creation of the settlement.
  • There is no immediate right to capital, although advances or appointments of capital may be made.
  • This type of trust is created in the UK by a UK settlor with the interest in favour of himself, will have minimal tax benefits if the trust remains resident in the UK.
  • If the trust is exported appointing non-UK resident trustees then considerable capital gains tax benefits will arise both where the settlor retains the interest in possession and where he vests this in someone other then his wife

Protective

  • These are interest in possession settlements designed to protect a beneficiary from his own actions.
  • The main beneficiary‘s right to income in the settled property is forfeited if, amongst other things, he attempts to assign his interest or becomes bankrupt. In that case, the trust property is automatically held upon discretionary trusts.
  • The trust is taxed in a similar manner to an interest in possession trust. Unlike the other trusts mentioned, it is virtually impossible to break these trusts before the original date envisaged for the end of the trust and there are statutory provisions as to the discretionary stage of the trust if the deed does not so provide.

Charitable

  • An individual may form a charitable trust but, until approved by the Charity Commissioners, it will not be afforded the favorable tax status and benefits given to charities.
  • The settlor may not retain any benefit whatsoever in any of the property settled.
  • If charitable, the trust will not suffer income tax or capital gains tax on its assets and gifts to a charity are exempt from inheritance tax.

Revocable Trust

  • The Settlor may amend the terms of a Revocable Trust in whole or part and may add or remove Beneficiaries. In effect he will maintain control of the Trust assets during his lifetime.
  • If a Trust is wholly revoked, the Settlor may recover the assets to himself or direct their transfer or elsewhere,
  • The Settlor may grant the power of revocation to a third party, e.g. a Protector.

Irrevocable Trust

  • The terms of an Irrevocable Trust may not be amended following the execution of the Deed.
  • This form of Trust is more widely used than Revocable Trusts as it may offer tax advantages in tax planning.

Settlor Controlled Trust

  • The Settlor may retain certain powers, such as the appointment of investment advisor or the appointment of bankers.
  • Not recommended for UK residents & very popular for Far Eastern Clients who can retain the right to control investments

Retirement Annuity Trust

  • Not generally used in the UK now unless established before 1999 but can be established under Guernsey law with a lot more flexibility i.e. no requirement to have an annuity can receive loans etc as

Short Form Trust

  • Very simple inexpensive way to form an offshore Trust often in conjunction with nominated investment advisor or insurance provider.
  • Permits settlor to add small sums on an ongoing basis

Testamentary Trust

  • This type of Trust can only be created under a Will.
  • Unlike the Trusts mentioned above, the establishment of this type of Trust will be of public record once the Will is submitted to probate.
  • It obviously cannot be for the settlor‘s benefit, as it comes into being only upon his death.


Guide to trusts
Residence & Domicile
Importance of a will or trust for Isle of Man investments