Insight

A brief overview of some of the different types of trust

"With different types of trust available each with their own individual purpose, it’s worth knowing what’s out there."

Bond Trust’s clients’ choice of type of trust very depends upon the circumstances of the settlor and the manner in which it is intended to benefit the beneficiaries. With different solutions to meet the specific needs of our clients, the most common types of trusts include:

  • Discretionary trust
  • Fixed interest trust
  • Accumulation and maintenance trust
  • Purpose trust
  • Reserved powers trust

This article covers the most commonly employed structure types and provides a brief summary of their typical uses.

Discretionary trust

This is the most common form of trust whereby the trustee may exercise their discretion with regard to the timing and amounts of assets distributed to the beneficiaries. Here, the beneficiaries have no legal rights to any particular portion of the trust fund.

It is usual for the settlor to provide guidance to the trustee with regard to the administration of the trust fund by way of a ‘Letter of Wishes’, however a Letter of Wishes is not legally binding, but the trustee will generally have regard to it when considering the exercise of discretionary powers. The letter offers guidance to the trustee in respect of its dealings with the trust fund and may be superseded by subsequent letters written by the settlor, as circumstances change.

Fixed interest trust

In a Fixed-interest trust, the trustee does not have any discretionary powers over the distribution of trust assets to beneficiaries, where it is the trust instrument that may specify exactly how and when assets are to be made available to the beneficiaries.

It is possible to arrange a combination of fixed and discretionary trusts. A trustee may, therefore, be given discretionary powers regarding distribution for a period of time, after which there is a requirement to distribute the capital of the trust fund in certain fixed proportions.

Accumulation and maintenance trust

An accumulation and maintenance trust may be used where the settlor wants to benefit a specific group of relations. This type of trust is often partly discretionary at the outset, becoming a fixed interest trust at a later date e.g The trustee has discretionary powers to distribute the income and/or capital of the trust amongst the minor beneficiaries (or to their parents on their behalf) for the purpose of their maintenance or education up to a specific age. When that age is reached, each child’s specified share of the trust fund will be distributed to him or her, or form a trust fund for that child.

Purpose trust

A purpose trust has no beneficiaries, but instead exists for advancing some non-charitable purpose of some kind. Trusts for charitable purposes are also technically purpose trusts, but they are usually referred to simply as charitable trusts.

Reserved powers trust

If the settlor wishes to reserve certain specified powers in relation to the trust fund, e.g. to direct the trustee as to investment of the trust assets, or the power to appoint or remove a trustee or beneficiary, he or she may set up a Reserved Powers Trust. The extent to which powers can be reserved is dependent on the settlor’s residence and personal circumstances.

Important notes on the taxation of trusts

Where a trust is resident in Jersey for tax purposes (where the administration of the trust is carried out in Jersey and a majority of the trustees are resident in Jersey) and none of the beneficiaries are resident in Jersey, the trust will only incur local income tax on income arising in the Island (although bank interest arising locally will be exempt from taxation).

At the time a trust is created there are several matters to consider:-

  • Any legal and tax implications arising in the settlor’s country of residence, the country of residence of the trustee and the country of residence of the beneficiaries.
  • The beneficiaries’ personal tax position.
  • The physical location and possible relocation of the assets to be transferred into the trust.

Consequently, independent legal and tax advice should be sought by the settlor prior to the formation of a trust.