A trust will typically be created in order to protect
beneficiaries who may not be able properly to look after
assets themselves e.g. because of their age or mental
incapacity.
Trusts can also be created for tax-planning reasons.
The most usual types of trusts which can be created
are listed below:-
Bare Trust
This type of trust is not, strictly speaking, a trust
at all. It arises where an asset is held in the names
of trustees but the trustees only nominally own the
assets within the trust - the real owners are the beneficiaries.
Such trusts arise commonly when children are entitled
to assets but they are not old enough to have legal
authority to deal with those assets.
Interest in Possession Trust
Under this type of trust a person (normally known as
a tenant for life) is entitled to the income from the
trust but is not entitled to the capital. Such a trust
might arise when, say, one spouse dies and wishes to
leave sufficient funds to the surviving spouse for the
rest of his or her life, but at the same time wishes
to ensure that the surviving spouse cannot dispose of
the capital assets.
Accumulation and Maintenance Trust
These trusts are often set up for children or grandchildren
and there are a number of tests which have to be satisfied
before the Inland Revenue will accept them as true "accumulation
and maintenance trusts". It is this type of trust
which we normally recommend should be created in the
case of a client who is making a will in circumstances
where he or she might die leaving young children. The
trust can be created on flexible terms e.g. the trustees
might be given the power to stipulate that different
beneficiaries can inherit assets from within the trust
on differing terms and in differing amounts. For example,
if one beneficiary is considered to be less responsible
than another beneficiary then the date upon which the
irresponsible beneficiary inherits assets can be at
a later date (and upon different terms) than the responsible
beneficiary.
Discretionary Trusts
The trustees of a discretionary trust have, as might
be supposed, a discretion as to how they treat the assets
within the trust. This discretion will apply both to
capital and income in the trust. The trustees will not
normally have an absolute discretion as the person creating
the trust will stipulate the people or charities in
respect of which the discretion can be exercised. If
a settlor is concerned about the way in which trustees
can exercise their discretion then, in the case of a
lifetime trust the settlor can be a trustee himself.
In all trusts the settlor can also sign a letter of
wishes, which gives non-binding instructions to trustees
as to how the settlor would wish their discretion to
be exercised in the future.
Trusts which are often included in wills are "Nil
Rate Band Discretionary Trusts". See our comments
under the heading "Estate Tax Planning" in
this connection.
What responsibilities does a trustee have?
The provisions of the Trustee Act 2000 have now come
into force and can affect any trusts, even one established
well before the Act was made.
There is a duty on trustees to invest funds in their
hands with a view to producing a financial return for
the trust. In performing this duty they must exercise
proper care. This requires more than mere honesty, good
faith and sincerity - there must be proficiency and
competence too.
Trustees have to observe some standard investment criteria:-
Suitability to the trust of the kind of investments
which may be made
The need for diversification and investment as far
as is appropriate to the circumstances of the trust.
However, this should not be treated as an exclusive
list of criteria and the circumstances of each trust
must be taken into account.
Trustees have to exercise their duties honestly and
fairly.
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