Types of Trust

Discretionary Trusts

The most flexible forms of trust and by far the most popular in international tax planning and wealth protection. The use of a discretionary trust will normally allow the trustees to appoint additional beneficiaries or to remove existing beneficiaries, and will usually also allow the trustees to distribute the income and capital of the trust between the beneficiaries as they see fit.

Interest in Possession Trusts

These differ from discretionary trusts in that the settlor (or nominated beneficiary) will normally be automatically entitled to the income and capital of the trust. At first sight this may appear attractive to an individual wanting to establish a trust but who also wants to be the prime beneficiary. However, as the settlor (beneficiary) is specifically included in the trust deed, many of the tax benefits applicable to discretionary trusts would normally disappear.

Accumulation and Maintenance Trusts

Almost always established for the benefit of the settlor's children. The trust deed will specify that the trust funds are to be used for the education and maintenance of the children up to a certain age, at which point they are entitled to their share of the trust capital. Depending upon the tax residence position of the settlor and beneficiaries, the same result can often be achieved through the use of a discretionary trust which can also then provide a number of tax benefits.

Asset Protection Trusts

These have increased in use in recent years with the rapid increase, primarily in the USA, of litigation against professional firms and the medical profession.

As a result, many individuals have elected to create trusts in neutral tax jurisdictions in which to place part of their assets, in the hope that they will be safe from any future claims. Although trusts can undoubtedly be used for future creditor protection, this is an area which must be treated with care, with specialised advice taken. Since the benefit of these trusts would also normally be held available for the settlor, tax saving opportunities are also not normally a factor.

Non-Charitable Purpose Trusts

Some of the characteristics of this type of trust are: 

• The trust is not bound by the rule of perpetuities and can exist indefinitely.
• There are no named beneficiaries in any of the trust documentation.
• A protector or enforcer (normally an independent third party nominated by the settlor) must be appointed to ensure that the trustees fulfil the purpose of the trust.

The main applications for this type of trust are:

• As a private trust established by a settlor to benefit philanthropic purposes that are not exclusively charitable in nature
• To hold shares in a family trading or investment company (indefinitely, as the trust is not bound by the rule of perpetuities and without the trustees being obligated to interfere in the running of the business)
• To hold shares in a private trust company
• As part of a financial or commercial transaction (often used as loan security)
• To provide complete privacy and creditor protection when, for example the purpose of the trust is to maintain or create a second non-charitable foundation for the benefit of the settlor and/or members of the settlor’s family.

Hybrid Companies

Hybrid companies have the attraction of looking like companies but with many of the same features as a trust.  A typical example would be a company limited by guarantee and having shares.  This would allow the shareholders to have voting and administrative powers, while the beneficial owners could be non-shareholder members vested with the rights to income and capital.  Such a structure would separate the beneficial interest from the control. These companies although unfamiliar to many, do have a number of benefits; one of which is that as a company they may be more readily accepted than a trust as an investing entity in civil law countries.

Dixcart can help you decide which type of trust you need, form the trust and incorporate any company it is to control - Contact Us.