Types of trusts

Types of trusts

Here are some of the most important types of trusts.

Revocable trust

With a revocable trust the settlor reserves the right to revoke the trust and cause the trustee to return the trust fund. In most cases the settlor also retains the right to modify or amend the trust and to cause distributions to be made to beneficiaries. Because it is so flexible, the revocable trust is very attractive to most international investors and will usually be accepted by the US tax authorities as a grantor trust. But conversely, a revocable trust may not always be acceptable to other tax authorities as a real trust (i.e. a real alienation of assets from the settlor’s estate).

Irrevocable trust

This is the most common structure in international tax planning. The settlor irrevocably transfers his or her assets to a trustee and thereafter has no control over the assets.

Discretionary trust

Under a discretionary trust the settlor generally has no direct power to revoke or amend the trust or its terms. The trustee has much more responsibility and discretion, and typically either no beneficiaries or only a class of beneficiaries are mentioned on the trust deed. In exercising its powers the trustee is guided (but not bound) by the settlor’s intentions and purpose in creating the trust. These can be set out in a letter to the trustee when the trust is established. Many discretionary trusts also provide for a protector, i.e. someone designated by the settlor whom the trustee should consult before exercising its discretion and who has the power to remove and replace the trustee.

Interest in possession trust

In this case the settlor alienates the assets irrevocably but retains the income from the assets during his or her lifetime. The trust will often provide for named beneficiaries in respect of the capital and income after the death of the settlor.