Wealth Matters: Choosing the Right Trust

Trusts come in many flavours, all of which may be of some use in wealth planning. This article aims to demystify some of the different types of trusts there are and what they do.

Bare trust

The simplest form of trust, often used for young beneficiaries, is a bare trust. Bare trusts allow beneficiaries to access all of the trust capital and income when they are over 18. Because bare trust beneficiaries have absolute entitlement at any time (subject to age), when money is put into one it is not a chargeable lifetime transfer (CLT), but instead a potentially exempt transer (PET). A CLT will suffer an initial 20% inheritance tax ((IHT) charge, but a PET will not.

Discretionary trusts

Trustees have complete discretion over the allocation of capital and income to beneficiaries. This could be useful if the settlor is worried beneficiaries are spendthrift and want to ensure the trust fund is not wasted. Putting money into a discretionary trust is a CLT. There are also recurring charges every 10 years (currently 6%), plus a pro-rated exit charge.

Interest in possession (IIP) trust

This type of trust allows there to be a beneficiary who has the right to receive the income (the life tenant) and another beneficiary who has the right to receive the capital (the remainderman) after the death of the life tenant. Normally, money put into an IIP trust forms a CLT, but there are some exceptions to this rule.

Discounted gift trust (DGT)

Normally used in conjunction with investment bonds, discounted gift trusts allow the settlor (the person who puts money into the trust) to retain rights to income generated by trust assets. For a discretionary DGT this reserved right reduces the amount of the money put into the trust that is charged as a CLT. DGTs can also be set up as bare trusts.

Loan trust

This is where a trust is set up, and the settlor loans money to the trust. The trust can then use the loaned money to make investments. When the loan is repaid, any growth on those investments remains within the trust.

This is not an exhaustive list, so please contact us for more information on how trusts might be able to help with your financial planning. 4 Shires can also run investment portfolios for your trust fund.

Risk Disclaimer: The value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance. This document is not intended as investment advice. Any security mentioned in this commentary is for information purposes only and is not a recommendation to buy. Wealth Matters is 4 Shires opinion led commentary. The contents of this webpage are for general information only and do not constitute investment or financial advice. This is not a recommendation to buy or sell any security or to take any action.