What are the Three Most Common Types of Trusts?
Trusts play a crucial role in estate planning in the UK, helping individuals protect and manage their assets for future generations. Understanding the different types of trusts available can help you make informed decisions when planning your financial future.
In this guide, we’ll explore the three most common types of trusts in the UK: Discretionary Trusts, Bare Trusts, and Interest-in-Possession Trusts.
1. Discretionary Trusts
Discretionary trusts offer flexibility and control over asset distribution. In this type of trust, the trustees decide how and when beneficiaries receive income or capital based on their individual needs.
Key Features:
✅ Flexibility: Trustees can adapt distributions based on changing circumstances.
✅ Asset Protection: Assets are protected from creditors and legal claims.
✅ Tax Implications: Income is taxed at a higher rate, but beneficiaries may receive distributions with lower personal tax rates.
When to Use Discretionary Trusts:
🔹 Beneficial for families with complex financial situations or where beneficiaries may not be financially responsible.
🔹 Useful for protecting vulnerable beneficiaries, ensuring funds are distributed sensibly over time.
2. Bare Trusts
Bare trusts are simple and transparent. They allow assets to be held in a trustee’s name but ultimately belong to a specific beneficiary.
Key Features:
✅ Simplicity: Minimal administration and clear ownership.
✅ Tax Efficiency: Income is taxed as if received directly by the beneficiary, making it advantageous for those in lower tax brackets.
✅ Age Considerations: Beneficiaries gain complete control over assets at age 18 (16 in Scotland).
When to Use Bare Trusts
🔹 Ideal for gifting assets to children, ensuring they receive full access in adulthood.
🔹 Commonly used for holding investments or property on behalf of minors.
3. Interest in Possession (IIP) Trusts
Interest in Possession Trusts (IIP) provide ongoing financial support to a chosen beneficiary (the “life tenant”) while preserving the capital for future heirs.
Key Features:
✅ Guaranteed Income: The life tenant has an immediate right to income from trust assets.
✅ Estate Planning Benefits: Protects capital while allowing income distributions.
✅ Tax Implications: Income is taxed as the personal income of the life tenant, while capital gains tax applies when assets are passed to remaindermen.
When to Use Interest in Possession Trusts
🔹 Common in second marriages, ensuring a spouse has financial security while safeguarding assets for children from a previous relationship.
🔹 Useful for wealth preservation and maintaining family assets across generations.
Choosing the Right Trust for Your Estate
Understanding the differences between discretionary trusts, bare trusts, and interest-in-possession trusts is crucial for effective estate planning.
🔹 Want flexibility and control? Choose a Discretionary Trust.
🔹 Need a simple, tax-efficient structure? A Bare Trust might be ideal.
🔹 Looking to provide for a spouse while protecting assets? Consider an Interest-in-Possession Trust.
📞 Need expert advice? Contact us today!
Don’t wait for a life-altering event to prompt you into action – check out how well your family is protected by viewing our free video TODAY!
Ray Best
Like his academic development, writing came late to Ray. He has written several published works, “Inheritance Tax Planning – My Way” and “Shareholder Protection & Partnership Protection” and has had four feature articles published in Tax Adviser magazine, but the publication he is most noted for is the joint collaboration with Tony Granger “Inheritance Tax Simplified”.