Types of Trusts

Trusts are inherently flexible. They can take many legal forms and have multiple practical applications. The following legal forms are among the most commonly encountered:

  • Bare Trust – Under a ‘bare’ or ‘simple’ trust, a trustee holds legal title to assets on behalf of a beneficiary who has absolute and immediate right to the assets. The trustee would not typically have any active duties to perform. Bare trusts may be created orally but are usually established by way of a simple document known as a ‘Declaration of Trust’.

    Bare trusts are commonly used to transfer assets to minors who lack legal capacity to deal with those assets and can also be useful if an individual wishes to acquire shares without that acquisition becoming a matter of public record. Bare trusts are ‘look through’ for tax purposes, such that the beneficiary, rather than the trustee, remains liable for any taxes arising.

  • Discretionary Trust – Under a discretionary trust, the trustee may pay or apply income and/or capital of the trust for the benefit of specified beneficiaries in such manner or proportions as the trustee may decide. The beneficiaries do not have an interest in trust assets and may not compel the trustee to exercise its discretion in their favour.

    To assist the trustee, the trust settlor will generally provide a ‘memorandum of wishes’ detailing how he/she would like the trust assets to be distributed. The tax implications of establishing a discretionary trust can be significant and therefore specialist tax advice should always be obtained.

  • Fixed Interest Trust – Under a fixed interest trust (also known as an ‘interest-in-possession’ trust or a ‘life-interest’ trust) the trustee has no discretion in the distribution of assets. Beneficiaries of the trust have a predetermined, fixed interest in a specific portion of the income or capital of the trust.

    A beneficiary may be granted a present entitlement to the income of the trust for a specific period of time, for example, their lifetime. On the expiration of that ‘limited interest’, the trust assets vest automatically and absolutely in a specified beneficiary. It is also possible for the settlor to provide for a succession of limited interests before the ultimate vesting of the assets.