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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 another named 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 is specifically included as the prime beneficiary, many of the tax benefits applicable to discretionary trusts would normally disappear.

Contingent Trusts

A more specialised version of the interest in possession trust. In this case any beneficiary given a life interest in the income of the trust can automatically lose this entitlement on the occurrence of a specified list of specific situations. The most common event is the personal bankruptcy of the beneficiary. This is designed to protect the income of the trust from the beneficiary's creditors.

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 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 not normally a factor.

Purpose Trusts

The main characteristic of a purpose trust is that no beneficiary is identified. The trust is formed for a specific purpose, which must not be immoral, contrary to public policy or unlawful. Three common uses for a non-charitable purpose trust are:

The main uses of purpose trusts have been for charitable purposes and one-off projects such as commercial ventures.

Hybrid Companies

These 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. These companies allow the shareholders to have voting and administrative powers, while the beneficial owners could be non-shareholder members in whom all the rights to income and capital are vested. Such a structure would separate the beneficial interest from the control. This arrangement has a number of benefits, one of which is that a company may be more readily accepted as an investing entity in some civil law countries than a trust would be.

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