Interest in Possession Trusts – An Explanation
Trusts are legal structures set up to manage assets for people. They enable individuals to control and protect family assets and different trusts are useful for different sets of circumstances.
One very commonly used trust is called an interest in possession trust. Although there is no statutory definition of what exactly an “interest in possession” is under English Law it is nevertheless possible to draw clear rules. Firstly under this type of trust the beneficiary must have a vested interest at the present time; he or she must have the right to the use of the trust property or the net income as it arises.
Interest in possession trusts are commonly used to provide a beneficiary with an income. Another very common use is to provide accommodation; under this type of interest in possession the beneficiary has the right to occupy a property until they die at which point the property passes to other beneficiaries and the life tenant has no control over who these other beneficiaries are.
This type of trust contrasts with discretionary trusts, which are very commonly used trusts, and under which the trustees are given the authority to decide how to deploy the trust income and, in certain circumstances, the capital. This is a fundamental difference between the two different types of trust and explains why discretionary trusts will often be used in circumstances where the beneficiary may not yet be responsible enough to make good use of the trust assets by using their own judgement.
In contrast, trustees have no such controls with interest in possession trusts. Indeed, if trustees have the right to withhold income arising from the trust from the beneficiary or the right to accumulate income regardless of the beneficiary’s preferences, then this is extremely likely to indicate that the beneficiary has no interest in possession. This does not, of course, prevent an income in possession trust from accumulating income as it may very well be the case that the beneficiary does not require the income arising from the trust; it is the beneficiaries entitlement to the income arising from the trust that determines whether the beneficiary has an interest in possession, not the actual receipt of that income.