Many trust instruments are similar although each trust instrument is specifically tailored to meet the individual requirements of the settlor. There are various types of trust, the choice of which will depend upon the circumstances of the settlor. Four common types are explained in more detail below.

Discretionary trust

The most common form of trust used in Gibraltar is the discretionary trust. The trustee has discretion to exercise his own judgment as to the manner and amount by which beneficiaries of the trust might benefit from the trust assets. The availability of this discretion to the trustee is a vital component of tax planning.

In addition, such a trust may be particularly useful where, at the time of creation of the trust, the needs of particular beneficiaries cannot be predicted. The beneficiaries have no legal rights to a particular portion of the trust fund. However, it is usual for the settlor to indicate his wishes to the trustee on the conduct of the trust fund and this expression of wishes is often contained in a "Letter of Wishes". The use of Letters of Wishes is dealt with in the article "Guidance to Trustees In Gibraltar".

Fixed interest trust

It is possible to make a trust in fixed form so that the trustee does not have discretionary powers when distributing the trust assets to beneficiaries. Instead, the deed stipulates the extent of a beneficiary's interest. For instance, the trustee may be required to distribute all of the income of the trust fund to a particular individual during that person's lifetime and, on that person's death, may be required to distribute the capital in fixed proportions to specified beneficiaries. Again, the determining factor in the decision to use such trusts is taxation.

It is possible to have a combination of fixed and discretionary trusts so that the trustee may have a discretionary power to distribute the income of the settlement for a period of time but may be required to effect an ultimate distribution of the capital of the trust fund in certain fixed proportions. Conversely, the trustee may be required to distribute the income to a specified person or persons in fixed proportions, but may have discretion on the distribution of the capital among the class of beneficiaries.

Asset protection trusts

As a result of the tendency in many countries such as the USA for individual citizens to litigate in pursuit of their claims, there is increased concern among individuals who may have a potential liability to creditor claims at some time in the future about the availability of their total wealth to meet such claims (unlimited liability).

Gibraltar has enacted legislation to enable Asset Protection Trusts to be set up as part of an overall estate planning exercise. Unlike "normal" trusts, these do have to be registered to be afforded the protection of the legislation, although registration is simple and confidential. Once registered, the ability of a certain type of creditor to litigate successfully against the trustee may be constrained.

Will trusts

Trusts may be created by a Will and such trusts may be of any type.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.