Understanding Different Types of Trusts

If you’re looking to put aside assets for another person, whether it’s a younger relative or an older one who is no longer capable of managing their own, then you might have considered a legal arrangement known as a trust. Trusts come in different types, each of which comes with its own set of advantages and drawbacks.

What is a trust?

A trust involves three parties. There’s the person who is managing the asset in question: namely, the trustee. Then there’s the person who will ultimately benefit from the asset (namely the beneficiary). Finally, there’s the person who provided the assets in the first place (called the settlor).

So, for example, if you wished to leave a large sum of money to a six-month old nephew, you might do it using a trust which keeps the money on hold until the young beneficiary reaches an age at which they might be reasonably expected to handle the money responsibly.

Let’s take a look at a few of the more common types of trust.

Bare trusts

This is the simplest possible variety of trust. Once it’s been set up, the beneficiaries can’t be changed. They gain an immediate right to the asset from the moment the trust is set up (provided that the beneficiary is eighteen in England and Wales, or 16 in Scotland).

Discretionary trusts

In this setup, the trustee is able to exercise some judgement in determining how the trust assets are ultimately distributed. The extent of this power will typically be outlined at the outset, in the deed. They might decide, for example, to impose conditions on the beneficiaries, or to release the assets in increments rather than all in one go. If there is more than one beneficiary, then the trustee might also decide to distribute the assets according to their own wishes.

This arrangement allows the trustee to act according to their judgement, and to the circumstances which exist at the time of the assets being passed to beneficiaries. Since the settlor might not have knowledge of what’s happened since the assets were put in trust, this can be hugely beneficial.

Living trusts

A living trust can be set up while the settlor is still alive, but it will come into effect before the settlor dies. This helps to get around the probate procedure, and might also facilitate some tax advantages.

Mixed trusts

There’s no rule saying you have to stick to one particular type of trust. Mixed trusts are, in effect, many different types of trust bundled into one. The more complicated the trust, the more costly it will be to come up with a suitable legal solution. That’s why having competent trust lawyers onside is considered a must when it comes making these complex financial arrangements.

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