Trusts are invaluable tools for estate planning, offering flexibility and control over how assets are managed and distributed. An interest in possession trust can be tailored to benefit a life tenant with income from the trust assets while preserving the capital for other beneficiaries. Combining different trust types with an interest in possession trust can address a variety of financial and familial needs. This article by Blackstone Solicitors explores the possibilities and benefits of such combinations, offering guidance on structuring an effective estate plan.
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Understanding Interest in Possession Trusts
An interest in possession trust grants a beneficiary, known as the life tenant, the right to benefit from the income generated by trust assets during their lifetime. Upon the termination of the life tenant’s interest, typically upon their death, the trust capital is passed on to another beneficiary, often referred to as the remainderman.
Combining Trust Types: Possibilities and Benefits
Combining different trust types can enhance the flexibility and effectiveness of an estate plan. Below are several ways to integrate other trusts with an interest in possession trust:
- Discretionary Trusts
What is a Discretionary Trust? A discretionary trust allows trustees the flexibility to decide how and when to distribute income and capital among the beneficiaries.
Combining with Interest in Possession Trusts:
- Purpose: This combination can ensure that a life tenant receives necessary income while giving trustees the discretion to support other beneficiaries as needed.
- Example: The trust could be structured so that a spouse receives income during their lifetime, while any surplus income or capital can be distributed at the trustees’ discretion to children or other relatives.
Benefits:
- Flexibility: Trustees can adapt to beneficiaries’ changing needs and circumstances.
- Tax Planning: Potentially beneficial for inheritance tax planning, as discretionary trusts are not included in a beneficiary’s estate.
- Bare Trusts
What is a Bare Trust? A bare trust holds assets for a single beneficiary, who has an absolute right to both the capital and the income from those assets.
Combining with Interest in Possession Trusts:
- Purpose: A bare trust can be combined to provide immediate outright ownership of certain assets to one beneficiary while ensuring another beneficiary receives ongoing income from the interest in possession trust.
- Example: Creating a bare trust for a young beneficiary to ensure they have funds for education while the interest in possession trust provides an elderly family member with a steady income.
Benefits:
- Simplicity: Straightforward structure with fewer administrative requirements.
- Accumulation and Maintenance Trusts
What is an Accumulation and Maintenance Trust? Designed to provide for minor beneficiaries, this trust allows assets to be accumulated and maintained until the beneficiaries reach a certain age.
Combining with Interest in Possession Trusts:
- Purpose: To provide income to a life tenant while also setting aside assets for younger beneficiaries until they reach maturity.
- Example: A grandparent establishes an interest in possession trust for an adult child’s support, with a separate accumulation and maintenance trust for grandchildren until they reach the age of 21.
Benefits:
- Education and Support: Ensures minor beneficiaries’ educational and maintenance needs are met.
Considerations When Combining Trust Types
Combining different trust types requires careful planning and professional advice to ensure compliance with legal and tax obligations. Here are some key considerations:
- Clear Trust Deeds
Ensure that the trust deeds for each trust type are clearly drafted, with explicit terms and conditions to avoid misunderstandings and conflicts. Ambiguity can lead to disputes among beneficiaries and trustees.
- Trustee Responsibilities
Trustees must be clearly aware of their responsibilities and the distinctions between different trust types. Training and professional advice can help trustees efficiently manage their duties and comply with regulatory requirements.
- Tax Implications
Different trust combinations can have varied tax implications, including inheritance tax, capital gains tax, and income tax. Engaging a tax advisor can help optimise the estate plan and minimise tax liabilities.
- Regular Reviews
As family dynamics and financial circumstances change, regularly reviewing and, if necessary, amending the trusts can ensure they remain effective and aligned with the settlor’s goals.
Case Studies
Here are two anonymised case studies illustrating the combination of different trust types with an interest in possession trust:
- Supporting Multiple Generations: A father established an interest in possession trust to provide his spouse with lifetime income. Concurrently, a discretionary trust was set up to address the needs of their children and grandchildren. This structure ensured that while the spouse had financial stability, the trustees could allocate funds to other family members as necessary.
- Balancing Immediate Needs and Long-Term Planning: Grandparents created a bare trust for their grandchild to cover educational expenses and an interest in possession trust to provide their adult child with income. Once the grandchild reached adulthood, they received the bare trust assets outright, while the interest in possession trust continued to support the adult child until their passing, after which the assets were passed to the grandchildren.
Conclusion
Combining different trust types with an interest in possession trust can offer a robust and flexible estate planning solution, addressing a range of financial and familial needs. Whether it’s providing for multiple generations, balancing immediate needs with long-term planning, or optimising tax benefits, these combinations can be tailored to suit individual circumstances.
How we can help
We have a proven track-record of helping clients create Trusts. We are a multidisciplinary firm and have all the expertise inhouse to satisfy the most exacting requirements of our clients. We will guide you through all the necessary legal due diligence in a comprehensive and timely manner. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact Our Wills and Probate Solicitors
It is important for you to be well informed about the issues and possible implications of creating a Trust. However, expert legal support is crucial in terms of ensuring your wishes are met as you would want them to be.
To speak to our Wills and Probate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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