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Types of Trust

Types of Offshore trusts

As we have already mentioned, there is no legal requirement for a trust document to conform to any pre-ordained legal format. The document can accordingly be tailored exactly to fit the circumstances. In practise however trusts fall into four general categories:

• Private trusts, described below
• Corporate trusts, including pension and employee benefit schemes
• Charitable trusts
• Purpose trusts, which can be used to benefit a good cause, or similar, but which is not itself defined as charitable

Discretionary trusts

This is the type of trust most commonly used in tax planning and wealth management schemes and its attractions become apparent from a brief examination of its main features:

• The beneficiaries may consist of a group of persons and it is not necessary to define at the outset which of them will actually receive benefits or when they will do so
• The beneficiaries may include unborn persons providing they are born during the time the trust can continue
• Further beneficiaries can be added
• Beneficiaries can be removed
• The trustees are generally given power to invest in anything in which a natural person may invest

The legal position is that the trustees can decide from time to time whether to make payments to the beneficiaries, out of the trust, and if they decide to do so, to which beneficiaries and, if more than one, how much to each. They may be required to consult with, or obtain the consent of a third party before doing so. The trustees can accordingly vary the pattern of administration of the trust to accommodate changes in the circumstances of the beneficiaries from time to time.

Professional trustees may not have a detailed knowledge of the financial affairs of the beneficiaries and the settlor may wish to offer them some guidance as to how they should go about exercising their various powers. He will normally do so by providing the trustees with a Letter of Wishes, in which he sets out his views as to how they should go about managing the assets and to whom those assets should eventually be distributed. The Letter of Wishes is a very convenient way for the settlor to keep the trustees aware of the family circumstances and it is always available for them to refer to if the settlor is not available, or if he is dead.

Interest in possession trusts

This trust differs from the discretionary trust in that the interests of the various beneficiaries are fixed at the time the trust is made and may not be varied by the trustees. An example of an interest in possession trust is a trust created by will and where a surviving spouse is entitled to receive the income for life after which both capital and income must be paid out to children.

Accumulation and maintenance trusts

Accumulation and maintenance trusts are normally for the benefit of children. Its terms would, typically, provide for the fund to be used for the education and maintenance of children during minority with surplus income being reinvested. Providing the capital must be distributed when the beneficiaries reach a certain age, an accumulation and maintenance trust can often provide tax benefits.

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