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Types of Trusts

Trusts are flexible by nature. Legally, they can take many forms and have many practical applications.

Most commonly encountered legal forms of Trusts include:

Discretionary Trust.

Trustee's discretionary powers include paying or applying trust income and capital to specified beneficiaries in any manner or proportion as they choose. It is not possible for the beneficiaries to compel the trustee to exercise its discretion in their favor since they do not have an interest in trust assets. As a guide to the trustee, the trust settlor will usually provide a 'memorandum of wishes' explaining how the trust assets should be distributed. It is always advisable to seek specialist tax advice before establishing a discretionary trust due to the significant tax implications involved.

Bare Trust

Trusts that are 'bare' or 'simple' hold legal title to assets for the benefit of beneficiaries with immediate and absolute ownership rights. In most cases, the trustee does not perform any active duties. A simple document known as a 'Declaration of Trust' is usually used in the establishment of bare trusts, which can be created orally. It is common to use bare trusts to transfer assets to minors who lack the legal capacity to handle them, or to acquire shares without having those acquisitions become public knowledge. Bare trusts are ‘look through’ for tax purposes, such that the beneficiary, rather than the trustee, remains liable for any taxes arising.

Fixed Interest Trust

It is the trustee's responsibility to decide how assets will be distributed under a fixed interest trust (also known as an interest-in-possession trust or a life-interest trust). It is predetermined that beneficiaries of the trust will receive a specific percentage of the trust's income or capital. Beneficiaries can receive present entitlements to trust income for a specific period of time, such as their lifetime. At the end of the 'limited interest' period, the trust assets automatically and absolutely vest in the beneficiary specified in the trust agreement. A succession of limited interests can also be provided for by the settlor before the assets are ultimately vested.

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