Types of Trusts

Bare Trusts

Bare trusts are the most basic type of trust . Assets in a bare trust are held in the name of a trustee but the beneficiary has the right to all of the assets of the trust once they are over the age of 18. In bare trusts, the trustee has no say in how the assets are allocated.

Discretionary Trusts

Often the most popular type of trust, discretionary trusts are usually used to provide for a group of beneficiaries such as children, grandchildren, etc. The difference between a bare trust and discretionary trust is that in discretionary trusts the responsibility for managing the assets in the trust is given to the trustees. The trustees can make certain decisions about how to allocate the assets as long as all trustees agree. For example, if the beneficiaries are a group of 5 children and two of them are struggling financially the trustees can decide to give more assets to the two who are struggling.

Discounted Gift Trust

A discounted gift trust (DGT) is an inheritance tax planning arrangement for those who want to undertake inheritance tax planning but also need an income. It involves gifting a sum to a trust and then pre-agreeing payments of capital from the trust during their lifetime. The pre-agreement involves how much you want to receive and the frequency of these payments.

The gift by the settlor is valued after applying a discount which is based on the person’s health, age, and sex. This amount is then considered outside of the settlors' estate ( the discounted part), which allows an immediate reduction in inheritance tax.

There are two types of discounted gift trusts, one allows you to name specific beneficiaries which cannot be changed which is called a bare trust, and the second is called discretionary where you don’t have to name specific beneficiaries and can give the ability to trustees to change the beneficiaries.

Loan Trusts

Loan trusts involve an individual setting themselves as the trustee for the benefits of someone else. The trustee makes a loan to the trust which is repayable on demand. The individual is able to invest the loan capital so that they can generate growth for the trust, and therefore the beneficiaries. The growth within the trust is exempt from inheritance tax.

Immediate Post Death Interest trusts

Immediate Post Death Interest trusts also known as IPDIT ensure that one beneficiary receives an ‘life interest’ in the assets in the trust. What this means is that they could have the right to receive rent from a property throughout the rest of their lives or have the right to live in a house. The amount in the trust has to be passed to different benefiricaies in the future.  IPDITs are very popular in second marriages. For instance, if a husband has children from a first marriage but now has a second wife he can set his second wife as the lifetime benificariy. This allows his second wife to receive an income from the trust until she dies. When she dies the capital in the trust is passed onto the husband’s children.

The Financial Conduct Authority do not regulate trusts and inheritance tax planning.

Other Related Articles