You are likely to have heard colleagues, friends or contacts talking about trusts. There are children's trusts, discretionary trusts, liferent trusts, loan trusts, personal injury trusts, discounted gift trusts, flexible reversionary trusts, disabled persons or vulnerable beneficiary trusts, excluded property trusts, home protections trusts, vulnerable beneficiary trusts… the list goes on and on.

Even when you work with trusts every day, the jargon can be confusing.

What is a trust?

A trust is a three-party relationship between:

  • the person who sets up the trust (the "settlor" or "truster");
  • the person(s) responsible for holding and managing the trust's assets (the "trustees"); and
  • the person(s) whose benefit the assets can be used for (the "beneficiaries").

    The truster sets up the trust by signing a trust deed, which sets out how the trust will work.  Assets are then transferred to the trustees. This can happen during the truster's lifetime, or on their death. The trustees hold the assets, but they can only do certain things with them. The trust deed tells them what to do with the capital assets, and what to do with the income produced by the trust fund. 

    Sometimes the trustees can decide for themselves who benefits from a selection (or "class") of beneficiaries, and sometimes the trust deed specifies who should benefit.

    Why are there so many different types?

    All the trusts mentioned in the introduction follow the basic "three-party" structure. The different names describe a slightly different combination (and/or the different tax treatment) of three different types of trust: a bare trust; a liferent trust; and a discretionary trust. 

    Complexities arise when a complicated combination of these different types of trusts is used to maximise the asset protection or tax advantages of the trust.

    Bare trusts

    A bare trust - sometimes described as a "trust for administration" - is a trust where the trustees hold the assets for a single, named beneficiary. The beneficiary is absolutely entitled to the assets and (once they are an adult, at age 16 in Scotland) they can demand to have the assets made over to them at any time. The trustees manage the assets in the best interests of the beneficiary, and are entitled to, for example, instruct lawyers and financial professionals to assist in management of the trust fund.

    Liferent trust

    A liferent trust is a trust where a beneficiary (or beneficiaries) is entitled to the income produced by the trust's assets. The trustees have no discretion to pay the income to anyone else. This is true regardless of the form which the income takes. If the trust property is a house for example, then the income beneficiary ("the liferenter") is entitled to live in that property. You would usually expect a "pure" liferent trust to provide (in the trust deed) what the trustees should do with the capital of the trust fund when the liferent ends. That is usually on the death of the liferenter but can be earlier (for example on remarriage).

    Discretionary trust

    A discretionary trust is one where the trustees have complete discretion as to the capital and income beneficiaries. The trustees are given wide powers to manage the trust fund in the best interests of a class of beneficiaries. No beneficiary has any entitlement to any part of the trust fund, and it is up to the trustees to decide who benefits and when.

    Why should I use a trust?

    Trusts are not just for wealthy individuals. There are lots of different reasons why you or your clients might consider setting up a trust. Some of the main reasons are:

    Asset protection and preservation: ensure the financial security of family members who may be vulnerable or not yet old enough to manage assets themselves; protect assets from creditors on bankruptcy or on divorce; and preserve family wealth for future generations.

    Business preservation: ensure the continuation of the family business where the passing of shares to the next generation can still mean retaining an element of control.

    Tax planning: mitigate your tax exposure. Trusts do not have a separate legal personality. However, they are subject to their own taxation regime. Depending on the type of trust, and how it was established, trustees can be liable for income tax, capital gains tax and inheritance tax (IHT) in the trust fund. 

    If you are looking to get assets out of your own estate for IHT purposes, you can usually gift up to £325,000 to trust without creating an immediate IHT charge.

    Why should I instruct professional advisers?

    We always recommend that trustees take professional advice to understand the nature of their duties, and to ensure that they comply with those duties while acting as trustee.

    The administration of trusts can be complex, particularly where a bespoke trust deed is not drafted. Often "off the shelf" trusts are comprised of a complicated combination of the above types of trusts, and this can have unintended consequences if the trustees do not fully understand the terms of the trust deeds. 

    The trustees must ensure they are acting in accordance with the trust deed (and their duties) or else the beneficiaries might have a right of action against them.

    There is also an increasing compliance burden on trustees, including taxation of the trust, HMRC's Trust Registration Service, and the Automatic Exchange of Tax Information regulations.

    Who should I contact?

    If you have questions about trusts which you or your client are involved with, or about setting up a new trust, please do not hesitate to get in touch with your usual Brodies contact.


    Stewart Gibson

    Senior Associate