Comparing the most common types of trusts for estate planning

A trust can be a valuable way of estate planning – ensuring that family assets are passed down to different generations. The three most common types, bare trusts, discretionary trusts and interest-in-possession trusts, all work differently. Each has specific rights for beneficiaries, gives trustees varying levels of control, and treats income and capital in different ways. Therefore, choosing the right trust depends on who the trust is for and what you intend it to do.

Bare trusts

Bare trusts are commonly used to hold assets for children or young adults where ongoing control is not needed. With a bare trust, the beneficiary has an immediate right to both the income and the capital, although the trustees look after the assets until the beneficiary reaches 18 and can legally take possession.

Bare trusts are known for their simplicity. The beneficiary is treated as the owner of the assets, so income tax and capital gains tax are usually charged on them. However, once assets are placed into a bare trust, the arrangement cannot be changed.

Discretionary trusts

Discretionary trusts are particularly useful where family circumstances may change, where beneficiaries are young or vulnerable, or where protecting assets is a priority. Because no one has a fixed entitlement, these trusts can help preserve wealth over time and protect it for future generations.

As the name suggests, a discretionary trust gives trustees discretion, or control, over how and when trust assets are distributed. Beneficiaries have no automatic right to income or capital. Instead, the trustees decide who benefits, how much they receive, and when. This makes discretionary trusts well suited for long-term protection, asset preservation, and ‘bloodline’ inheritance protection. However, discretionary trusts can face higher tax charges and are subject to specific income tax, capital gains tax and inheritance tax rules.

Interest-in-possession trusts

These trusts are commonly used in estate planning for second marriages or blended families. One beneficiary, known as the life tenant, has an immediate right to benefit from the trust assets, often through receiving an income from the capital. While the trustees will manage the trust assets, the come arising from the trust assets cannot be diverted to anybody other than the life tenant. The life tenant does not usually have access to the capital, nor do they inherit trust assets. When the life tenant dies, or the life interest ends, they instead pass to the other named beneficiaries.

Interest-in-possession trusts are often used to support a surviving spouse while preserving capital for children. Essentially, trustees cannot change who benefits, and tax treatment can be complex, depending on when the trust was set up.

Which trust is right for you?

Each type of trust is treated differently for income tax, capital gains tax and inheritance tax, and this can affect the overall outcome. There is no single right answer, but professional advice can help ensure the trust you choose supports both your family plans and your wider financial goals.

Comparison between Bare, Discretionary, and Interest-in-possession Trusts

Type of trust	Beneficiary rights	Trustee discretion	Access to income and capital	Ideal use cases	Tax considerations
Bare Trust	Beneficiary has an immediate right to income and capital	None. Trustees act on behalf of the beneficiary	Full access once the beneficiary reaches 18	Holding assets for children or simple gifts	Taxed as if owned by the beneficiary
Discretionary Trust	No fixed entitlement for any beneficiary	High. Trustees decide distributions	Access depends on trustee decisions	Long-term protection and family wealth planning	Subject to trust tax rates and IHT charges
Interest-in-Possession Trust	Life tenant has an immediate right to income only	Limited. Trustees manage assets but must pay income to life tenant	Income only for life tenant. Capital preserved for others	Providing income for a spouse while preserving capital	Tax treatment depends on structure and timing

Trust arrangements with Attwaters

At Attwaters, our Wills, Trusts & Probate team has been advising clients for over a century, combining technical expertise with a practical understanding of family needs.

To discuss how trusts could support your long-term planning, contact enquiries@attwaters.co.uk or call 0330 221 8855.