Various types of trusts serve different purposes in estate planning and asset management. Among the most commonly used are interest in possession trusts and bare trusts. Here, Blackstone Solicitors provides an in-depth comparison between these two trust types, highlighting their key differences, advantages, and considerations for choosing the right one.
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Understanding the Basics
Interest in Possession Trusts
An interest in possession trust grants an immediate right to benefit from trust assets to the life tenant, typically in the form of income. The life tenant enjoys this right for a specified period or their lifetime. After the trust’s conclusion, the assets (the trust capital) pass to another beneficiary, known as the remainderman.
Bare Trusts
A bare trust, also known as a simple trust, holds assets for a specific beneficiary who has an absolute right to both the capital and income of the trust. The beneficiary can demand the transfer of the trust assets into their own name at any time once they reach adulthood, typically 18 years old.
Key Differences
- Beneficiaries’ Rights
- Interest in Possession Trusts: The life tenant has the right to income from the trust assets, while the remainderman receives the capital upon the trust’s termination.
- Bare Trusts: The beneficiary has a straightforward right to both the income and capital, with the ability to take control of the trust assets upon reaching adulthood.
- Control and Flexibility
- Interest in Possession Trusts: The settlor can exercise significant control by defining the conditions under which the life tenant will receive income and when the remainderman will receive the capital. This structure provides flexibility in managing and protecting assets across generations.
- Bare Trusts: The trust is relatively simple, with less control retained by the settlor. The beneficiary has the absolute right to the trust’s assets once they attain maturity, limiting the settlor’s ability to impose conditions on the distribution.
- Tax Implications
- Interest in Possession Trusts: Tax implications can be more complex. The life tenant is typically liable for income tax on the income they receive, and the trust assets might be considered part of their estate for inheritance tax purposes upon their death.
- Bare Trusts: The beneficiary is liable for income tax and capital gains tax as if they owned the assets outright. The trust assets are considered part of the beneficiary’s estate, subject to inheritance tax upon their passing.
- Administrative Responsibilities
- Interest in Possession Trusts: Trustees have ongoing responsibilities, including managing the trust assets, distributing income to the life tenant, and eventually transferring capital to the remainderman. This requires diligent administration and record-keeping.
- Bare Trusts: Administration is comparatively straightforward, as the trustees simply manage the assets until the beneficiary reaches adulthood and decides to take possession.
Advantages of Interest in Possession Trusts
- Asset Protection: The settlor can protect assets for future generations by ensuring that the life tenant receives only income, while preserving the capital for the remaindermen.
- Income Provision: Provides a reliable source of income for the life tenant, which can be particularly beneficial for dependent relatives.
- Flexibility: The structure allows for tailored arrangements that align with the settlor’s objectives and family dynamics.
Advantages of Bare Trusts
- Simplicity: Bare trusts are easy to set up and administer, making them a straightforward option for transferring assets to beneficiaries.
- Immediate Ownership: Beneficiaries have an unambiguous claim to both income and capital, providing clarity and direct access to the trust assets once they reach adulthood.
- Tax Transparency: Tax treatment is more transparent, as beneficiaries are taxed directly as if they held the assets personally.
Considerations for Choosing the Right Trust
Financial Needs and Goals
- Interest in Possession Trusts: Suitable for situations where the settlor wants to provide ongoing income to a specific beneficiary while preserving the capital for future generations.
- Bare Trusts: Ideal for straightforward asset transfers where the beneficiary is trusted to manage the assets responsibly upon reaching adulthood.
Family Dynamics
- Interest in Possession Trusts: Offers the ability to balance the needs of multiple generations, accommodating complex family dynamics and providing structured financial support.
- Bare Trusts: Favours simpler family arrangements where the settlor trusts the beneficiary to take full control of the assets at maturity.
Administrative Capacity
- Interest in Possession Trusts: Requires trustees who are capable of ongoing management and administration, including handling income distributions and tax compliance.
- Bare Trusts: Involves less administrative burden, making it suitable for situations where simplicity is desired, and the settlor or trustees prefer minimal interference.
Case Studies
To illustrate the practical applications of these trusts, here are a couple of anonymised case studies:
- Interest in Possession Trust for Family Support: A father created an interest in possession trust to provide his spouse with income for life. After her passing, the capital was designated to pass to their children. This arrangement ensured that the spouse was financially supported while preserving the estate for their descendants.
- Bare Trust for Minor Beneficiary: Grandparents set up a bare trust for their grandchild, transferring shares and savings. Upon reaching adulthood, the beneficiary took control of the assets, which had grown significantly in value, providing them with a substantial financial foundation to start their adult life.
Conclusion
Understanding the key differences between interest in possession trusts and bare trusts is crucial for effective estate planning. Each trust type offers unique benefits and considerations that align with different financial goals, family dynamics, and administrative preferences.
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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