Understanding Trusts – An Introduction

The term flexible trust was originally associated with the use of a type of trust known as a discretionary trust.

Trusts have been used inside of Wills for many, many years. The rules changed in March 2006 and the use of the ‘2 year' discretionary trust has opened significant doors for planning powerful and ‘flexible' Wills.

A trust is one of the few devices recognised within the legal system that provides a mechanism to allow the concept of ‘Own Nothing Control Everything' (ONCE – did you see what we did there?) to be explored and utilised to its core.

Understanding trusts and taxes

What Are The Different Types of Trusts?

There are two main types of trusts. An Absolute Trust and Discretionary Trust. There is also a special type of trust, what we like to call a hybrid or the best of both worlds trust, known in the legal world as an Interest In Possession trust or IPDI for short.

To keep things super simple. An Absolute Trust is one where the trust is literally just holing onto the asset on behalf of the beneficiary, however the beneficiary calls all the shots and are in control. Not much different to an individual holding onto their own asset. Therefore it's not ‘really' seen as a trust at all, however they are still very powerful if used for the purpose intended. Normally used for Minor children (under 18) who are deemed not yet eligible to start calling the shot according to the law.

A Discretionary Trust is totally opposite to an absolute trust. The Trustees have 100% discretion and autonomy over the asset. They have full fiduciary duty towards the beneficiary and their powers are conferred to them by the Settlor the creator of the trust. The Beneficiary does NOT have an automatic right to enjoy the property unless the Trustees ‘appoint' them. And this is what makes such a trust extremely powerful. The asset does not belong to the beneficiary, it belongs to the trust!

Here's where it gets interesting… An Interest In Possession Trust (IPDI) has the best of both worlds. The trustees have a say with regards to the capital (normally the underlying asset such as the bricks and mortar and land title to a house or the use of a car but not the ownership of the car itself). The Beneficiary, has absolute authority to enjoy the fruit or benefit of the asset, what is known as income. So you can live in the house, play music, use the shower, but you can't just decide to sell it or give it away as it's not yours. Again, this type of trust is very powerful if used for the purpose it was intended.

Tax, each type of trust has a complete different tax treatment and so this is where things get real complicated and hence why you should consider speaking to a specialist (we are specialist) and not a generalist in this area.

Word of Warning About Trusts…

Have you ever heard the phrase…'Power is useless without Control'? Trusts are one of many legal tools that can prove to be very powerful and beneficial if used in the right way, how they were designed to be used.

It is vital when discussing or planning to utilise trusts or you are perhaps a beneficiary of a really old trust and do not have the appropriate, qualified professional to guide you, so you and your family will end up the victors rather than the victims.

The timing of the trust creation is very important. There are also relevant tax laws specific to trusts that need to be understood and explained, else it will lead to significant problems including ten year anniversary charges, exit charges and possibly even entry charges of 20% (at the time of writing). This could affect your beneficiaries and not just yourself.

Selecting trustees without the proper advice could be absolutely destructive to all the planning and expectations you may have. More context regarding trusts can be found in our body of work called “Lifetime Trusts Explained” which will delve deeper into the subject matter including trusts and their taxation.

Again, it is highly advised you seek specialist advice regarding trusts. We offer a bespoke service regarding trusts and trust planning at ONCE WT.

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