There are two basic types of trust: discretionary, where trustees are involved in deciding to whom benefits are paid, and bare, where the settlor dictates who benefits go to and this is then fixed.
There are normally three parties involved in setting up a trust:
1) The settlor. This is the person who creates the trust. They will appoint trustees to administer the trust and decide who will benefit from the assets.
2) The trustees. These are the people the settlor chooses to hold and manage the assets, according to the terms of the trust, for the sole benefit of the beneficiary.
3) The beneficiary. This is who the settlor wants to benefit from the assets held under trust.
Generally most trusts provided by insurance companies are either ‘discretionary’ trusts or ‘bare’ trusts, according to Ian Smart, head of product development and technical support at Bright Grey and Scottish Provident.
Mr Smart says most insurers offer trusts under the ‘discretionary’ umbrella, meanings the trustees have the ability to influence who should benefit and when. The list of possible beneficiaries is set out in the trust and this can vary depending on the main purpose of the policy.
For example, a trust being used with a policy intended to protect the family or provide for an inheritance tax bill will include a list of beneficiaries that will typically include the spouse, partner, children, grandchildren and other relatives of the policyholder.
On the other hand, a trust used with a business protection policy would only include other partners or shareholders who are actively involved in the business. A trust may also contain provisions that allow certain benefits such as payments on critical illness to be held for the benefit of the policyholder themselves.
Advisers may also come across ‘bare’ trusts, which specify exactly who will benefit and cannot be changed at a later date. As the name suggests, Mr Smart says bare trusts give trustees no discretion over who can benefit.
For life insurance, Chris McNab, protection product manager of LV, defines three broad categories clients can opt for: fixed trusts, power of appointment trusts (flexible trusts) and discretionary trusts.
A fixed trust is another term for a ‘bare trust’ (or ‘absolute trust’) and is the simplest type of trust, according to Mr McNab. The beneficiaries and how much they will receive is fixed when the trust is set up and cannot be changed in the future.
While this has its advantages - clients can stipulate exactly who gets the proceeds and no-one else can change this – Mr McNab says advisers and their clients should ask what happens if their circumstances change while they are still alive.
A power of appointment, or ‘flexible’, trust still has named beneficiaries - known as default beneficiaries - but, importantly, Mr McNab says there is flexibility for the trustees to change these if circumstances change.
“Clients name all the groups of people for example children or grandchildren, or individuals that they might want to benefit from the insurance policy, when they set up the trust.