Interest in possession trusts and discretionary trusts are both common estate planning tools, but they differ significantly in their structure, flexibility, and tax implications. Understanding these differences is crucial for making informed decisions about estate planning strategies.
Please click here to find out more about our Wills, Trusts and Lasting Power of Attorney Services.
Free Initial Telephone Discussion
For a free initial discussion on how we can help you deal with the legal implications of creating a Trust, get in touch with us today. We are also experienced in dealing with all aspects of Wills and Probate and we will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help ensure you avoid the stress of dealing with these issues on your own. Simply call us on 0345 901 0445 or click here to make a free enquiry and a member of the team will get back to you.
Interest in Possession Trusts
- Key Features: In an interest in possession trust, the beneficiary is entitled to receive all of the income generated by the trust assets. This income can take various forms, including dividends, rent, and interest. The capital of the trust remains intact and is typically passed on to another beneficiary, often a remainderman, upon the death of the income beneficiary.
- Flexibility: Relatively inflexible. The beneficiary’s right to receive income is generally fixed, and trustees have limited discretion in how the income is distributed.
- Taxation: Generally subject to income tax on the income received. Capital gains tax may be payable on any capital gains realised by the trust.
Discretionary Trusts
- Key Features: Trustees have wide discretion over how and when to distribute income and capital to the beneficiaries. They can choose which beneficiaries receive distributions, the amount of each distribution, and whether to distribute income or capital.
- Flexibility: Highly flexible. Trustees can tailor distributions to meet the changing needs of the beneficiaries and respond to unforeseen circumstances.
- Taxation: Subject to more complex tax rules, including potential income tax and capital gains tax on trust income and gains. Also subject to potential inheritance tax charges on the value of the trust fund.
Key Differences
| Feature | Interest in Possession Trust | Discretionary Trust |
| Beneficiary’s Rights | Entitled to all income | No guaranteed right to income or capital |
| Trustee’s Discretion | Limited discretion | Wide discretion over distributions |
| Flexibility | Less flexible | Highly flexible |
| Taxation | Generally simpler tax treatment | More complex tax implications |
| Control | Beneficiary has more control over income | Beneficiaries have less control over distributions |
Choosing Between Trust Types
The choice between an interest in possession trust and a discretionary trust depends on various factors, including:
- The settlor’s objectives: What are the settlor’s primary goals for the trust? Are they primarily concerned with providing for the income needs of a specific beneficiary, or do they prefer to give trustees more flexibility in how the trust funds are used?
- The beneficiaries’ needs and circumstances: What are the beneficiaries’ ages, financial needs, and personal circumstances?
- Tax considerations: What are the potential tax implications of each trust type?
- Estate planning goals: How does the trust fit into the overall estate plan?
When to Consider an Interest in Possession Trust
- Providing for a specific beneficiary’s income needs: When the primary objective is to ensure that a particular beneficiary receives a regular income stream.
- Protecting assets from creditors: In some cases, an interest in possession trust can provide some protection for trust assets from the creditors of the income beneficiary.
- Relatively simple estate planning: When a straightforward and predictable distribution structure is desired.
When to Consider a Discretionary Trust
- Flexibility and adaptability: When flexibility is important, such as when the beneficiaries’ needs may change over time.
- Protecting assets from beneficiaries’ creditors: Discretionary trusts can provide greater protection for trust assets from the creditors of the beneficiaries.
- Complex family situations: When there are multiple beneficiaries with varying needs and circumstances.
- Tax planning: Discretionary trusts can offer certain tax advantages, such as the ability to accumulate income within the trust.
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.
Comments are closed.
