Different Types of Trusts in Scotland: A Simple Guide

Trusts are an important legal tool in Scotland that can help manage and protect assets. Whether you’re planning your estate, protecting wealth for future generations, or supporting a vulnerable person, trusts can offer flexibility and control. This guide explains the main types of trusts in Scotland and how they work.

What is a Trust?

A trust is a legal arrangement where one party (the “trustee”) holds and manages assets for the benefit of another (the “beneficiary”). The person who sets up the trust is called the “settlor”. Trusts are often used in estate planning, asset protection, and charitable giving.

Why Use a Trust?

Trusts can be useful for many reasons, including:

• Asset Protection: Keeping assets safe from creditors or financial risks.
• Estate Planning: Ensuring your wealth is passed on according to your wishes.
• Tax Planning: Managing inheritance tax and other liabilities.
• Supporting Vulnerable Beneficiaries: Providing for children or adults who may not be able to manage assets themselves.

Types of Trusts in Scotland

Bare Trust (Simple Trust)

A bare trust is straightforward. The trustee holds the assets in their name but must act entirely on behalf of the beneficiary. The beneficiary has the absolute right to both the income and the capital.

Often used for:  Gifts to minors, where assets are held until they reach 16.

Discretionary Trust

A discretionary trust gives the trustees flexibility over how and when to distribute income and capital among beneficiaries. The settlor provides guidance in a letter of wishes, but the trustees have the final say.

This type of trust is often used for:  Protecting assets from financial risks or supporting vulnerable beneficiaries who may need managed financial support.

Interest in Possession Trust (Life Interest Trust)

This trust entitles a beneficiary to the income generated by the trust during their lifetime, while the capital is preserved for other beneficiaries after their death.

Common uses include: Providing for a surviving spouse while preserving assets for children from a previous relationship.

Accumulation and Maintenance Trust

This trust allows income to be retained and reinvested until a specific event occurs, such as the beneficiary reaching a certain age.

These are often used for: Holding assets for children until they reach adulthood.

Charitable Trust

A charitable trust is set up for the benefit of charitable purposes. It must meet the requirements set out by the Office of the Scottish Charity Regulator (OSCR).

Common uses include: Supporting charitable projects and organisations.

Trusts for Vulnerable Beneficiaries

These trusts are designed to benefit individuals with disabilities or those unable to manage finances themselves. They often offer tax advantages to ensure maximum benefit to the individual.

Protective Trust

A protective trust can safeguard assets from a beneficiary’s creditors or financial irresponsibility. The beneficiary initially has a right to income, but this can be revoked if certain conditions are met (e.g., bankruptcy).

How to Set Up a Trust in Scotland

Setting up a trust involves several steps:

• Decide the Purpose: Clarify why you need the trust and what you want it to achieve.
• Choose the Trustees: Select trustworthy individuals who will manage the assets responsibly.
• Draft the Trust Deed: A legal document outlining the trust’s terms and conditions.
• Transfer the Assets: The settlor must transfer ownership of the assets to the trustees.
• Register the Trust: Some trusts must be registered with HMRC and comply with tax regulations.

Key Considerations When Setting Up a Trust

• Control: Some trusts give trustees full discretion, while others limit their powers.
• Tax Implications: Trusts can affect inheritance tax and income tax.
• Legal Advice: Professional guidance ensures the trust is properly set up and effective.

Conclusion

Trusts can be a powerful tool for managing and protecting assets, but choosing the right type is essential. If you’re considering setting up a trust in Scotland, it’s wise to seek legal advice to ensure your needs are met and your interests are protected.

If you are looking for an experienced solicitor, would like to discuss matters or gain a greater understanding of the process of setting up a Trust, then please contact our experienced Private Client Team on 01324 622 888 or contact help@randa-fa.co.uk and we would be delighted to assist.