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Under UK law, there are basically two main types of trust; all other trusts are hybrids of these. These trusts are as follows:
Under this type of Trust, there is a beneficiary who is entitled to receive the income earned by the Trust assets, or if there are assets of a type not generating income, e.g. a house, to the use of that asset. The Beneficiary is not entitled to outright ownership of the assets, but to the enjoyment during his or her life, or for such shorter period as may be stipulated in the Trust Deed. Such a Beneficiary is commonly known as a Life Tenant or Tenant for Life.
Upon the death of the Life Tenant or upon an earlier event specified in the Trust Deed, the Trust Deed will specify what is to happen to the Trust Fund. There may be a succeeding Life Tenant, the Trust may then turn into a Discretionary Trust, or the Trust Funds may be distributed to named Beneficiaries.
This type of Trust is commonly used as a measure against potential Creditors or to guarantee a Dependant's security of tenure of a property. It is classed as a Potentially Exempt Transfer for UK Inheritance Tax Planning purposes. This means that the making of such a Trust will have no Inheritance Tax consequences for the Settlor if he is not a Beneficiary under the Trust, provided that he survives for seven years.
This type of Trust is the most commonly used for Offshore Trusts as it enables the greatest flexibility coupled with a great degree of confidentiality if required. The Trust has no Beneficiaries who have an outright entitlement to receive the Trust Assets or the income from them. Instead, the Trustees may choose to benefit from a group of Beneficiaries mentioned in the Trust Deed. It is common for a Letter of Wishes to be given to the Trustees by the Settlor at the time the Trust is created, setting out the way the Settlor wishes the Trustees to act. It is common for the Settlor to have the power to remove the Trustees if, for example they were not to comply with his wishes. An added protection is afforded by the appointment of a Protector who will have a right of veto in some areas of the Trustees management of the Trust. Under a Discretionary Trust, the Trustees may if they so wish, accumulate the income of the Trust rather than pay out to Beneficiaries, provided that the Law Against Perpetuities is not breached. This allows Trustees to accumulate income for not more than 21 years and the Trust must come to an end in not more than 80 years from the date of creation. These time limits may well not apply to other jurisdictions or the time limits may be longer.
The Discretionary Trust is the basis for a wide variety of defensive tax planning instruments. The discretionary nature of the Trustees' powers increases its protective nature. The making of a Discretionary Trust gives rise to an immediate Inheritance Tax charge at half the death rates for UK domiciliaries. It is important that the UK domiciled Settlor is excluded from benefiting under the Trust to avoid any adverse Inheritance Tax implications.
We would be pleased to advise you further on any aspect of Trust Planning.
