Trusts are a versatile legal arrangement used to manage and protect assets, offering tailored solutions for a variety of financial and personal needs. Among the numerous trust types available, interest in possession trusts are particularly well-known for balancing the needs of income beneficiaries and capital beneficiaries. In this article, we will explore the features of interest in possession trusts, compare them with other types of trusts, and highlight their unique benefits and applications.
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Understanding Interest in Possession Trusts
An interest in possession trust is a type of trust where a beneficiary, known as the life tenant, has the immediate right to receive income generated by the trust or to use its assets. The capital of the trust is preserved for remainder beneficiaries, who will inherit the assets when the trust ends, typically upon the life tenant’s death.
These trusts are often used in estate planning to ensure that one group of beneficiaries (such as a spouse) can benefit from income or use of property during their lifetime, while another group (such as children) retains the right to the trust’s capital.
Key Features:
- Life Tenant Rights: The life tenant has an immediate entitlement to income or use of assets, such as residing in a trust-owned property.
- Capital Preservation: The trust’s capital is protected for the remainder beneficiaries, ensuring its intended purpose is achieved.
- Flexibility: Trustees may have discretion over how assets are managed to balance the needs of all beneficiaries.
Other Types of Trusts
While interest in possession trusts are widely used, other trust structures may be better suited to specific circumstances. Below, we examine some common alternatives:
- Discretionary Trusts
In a discretionary trust, the trustees have the authority to decide how income and capital are distributed among beneficiaries. This flexibility allows trustees to respond to changing circumstances and make decisions that align with the settlor’s intentions.
Key Features:
- Trustee Discretion: Trustees decide when and how to distribute assets.
- No Fixed Entitlement: Beneficiaries have no automatic right to income or capital.
- Tax Efficiency: Discretionary trusts can be useful for inheritance tax planning, though they are subject to specific tax rules, such as the periodic charge.
Common Uses:
- Providing for multiple beneficiaries with varying needs.
- Protecting assets from creditors or marital disputes.
- Supporting individuals who may not be capable of managing funds independently.
- Bare Trusts
A bare trust, also known as a simple trust, gives beneficiaries an absolute right to both income and capital. The trustees hold the assets on behalf of the beneficiaries, but the beneficiaries have full control over how the assets are used once they reach the age of majority.
Key Features:
- Beneficiary Control: Beneficiaries gain full control at age 18 in England and Wales.
- Simple Structure: Minimal trustee involvement once beneficiaries come of age.
- Tax Treatment: Income and gains are taxed as the beneficiaries’ personal income and gains.
Common Uses:
- Holding assets for children until they reach adulthood.
- Simplifying the administration of smaller estates.
- Accumulation and Maintenance Trusts
These trusts are designed to provide for the needs of young beneficiaries until they reach a specified age, at which point they gain access to the trust’s assets. The trustees may accumulate income within the trust or use it for the beneficiaries’ maintenance and education.
Key Features:
- Support for Young Beneficiaries: Income can be used for education and living expenses.
- Delayed Access: Beneficiaries typically gain access at a pre-determined age.
- Tax Considerations: Similar to discretionary trusts, they may be subject to inheritance tax charges.
Common Uses:
- Providing for children or grandchildren.
- Ensuring funds are used responsibly before beneficiaries reach adulthood.
- Charitable Trusts
Charitable trusts are established to support specific charitable purposes, such as education, poverty relief, or environmental conservation. These trusts enjoy favourable tax treatment, as long as they meet legal requirements for charitable status.
Key Features:
- Public Benefit: Assets must be used for recognised charitable purposes.
- Tax Exemptions: Income and gains are generally exempt from tax.
- Perpetuity: These trusts can exist indefinitely to support ongoing charitable activities.
Common Uses:
- Establishing a legacy or philanthropic fund.
- Supporting long-term charitable initiatives.
Comparing Interest in Possession Trusts to Other Trust Types
Each type of trust has distinct advantages and limitations, making them suitable for different situations. Below, we compare interest in possession trusts to other trust types based on key criteria:
| Criteria | Interest in Possession Trusts | Discretionary Trusts | Bare Trusts | Accumulation and Maintenance Trusts | Charitable Trusts |
| Beneficiary Rights | Immediate income rights | No automatic entitlement | Full control at age 18 | Delayed access until specified age | Public benefit only |
| Trustee Discretion | Limited | High | Minimal | Moderate | Moderate |
| Tax Treatment | Complex | Periodic and exit charges | Beneficiaries’ personal tax | Similar to discretionary trusts | Favourable |
| Common Uses | Balancing income and capital | Flexibility for changing needs | Holding assets for minors | Supporting young beneficiaries | Philanthropy |
Choosing the Right Trust
Selecting the appropriate trust type depends on various factors, including:
- Purpose of the Trust: Is the trust intended to provide income, protect assets, or support charitable causes?
- Beneficiary Needs: Do beneficiaries require immediate access, long-term support, or protection from external risks?
- Tax Considerations: What are the potential inheritance, capital gains, and income tax implications?
- Legal and Administrative Requirements: How complex are the rules governing the trust, and what level of oversight is needed?
Conclusion
Trusts are powerful tools for managing and distributing wealth, offering solutions tailored to diverse family and financial circumstances. Interest in possession trusts, with their clear division of income and capital rights, are ideal for balancing the needs of different beneficiaries. However, other trust types, such as discretionary or bare trusts, may be more suitable depending on the specific objectives and requirements.
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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