SCOTT WOODS writes our financial columns, MONEY MATTERS
An absolute trust is one where the beneficiary has an absolute interest in the trust property and the sole duty of the trustee is to hold the trust property and transfer this to the beneficiary when required. It is therefore not possible for the trustees to change the beneficiary or their interest in the trust.
Beneficiaries will normally be able to demand the trust property from the trustees if they are aged 18 or over in England. These trusts are often referred to as ‘bare’ trusts.
A flexible trust (or power of appointment trust) is one that allows the trustees to appoint and change the beneficiaries from amongst a range of potential beneficiaries listed in the trust document. This trust also names a ‘main’ or ‘default’ beneficiary, who will ultimately benefit if the trustees do not make any appointments.
The ‘default’ beneficiary has what is referred to as an interest in possession and so has a right to any income generated by the trust investments. The trustees are usually given a power to change the interest in possession beneficiary, either by replacing them with a beneficiary from the class of potential beneficiaries, or by simply adding a beneficiary to share the current beneficiary’s interest in possession.
Flexible trusts have traditionally been offered by insurance companies for use with their range of life assurance contracts, including investment bonds.
A discretionary trust is one where there is a defined class of beneficiaries, but under which no beneficiary has a right to the income or capital of the trust. The trustees have absolute discretion over the distribution of income and capital and can, if they so choose, accumulate the income within the trust, although this can only be done for a limited period.
A discretionary trust is therefore a type of trust under which no beneficiary has an interest in possession.