Accumulation and Maintenance and Mixed Trusts

Prior to 2006, accumulation and maintenance trusts were very popular. This particular type of trust was most commonly used by grandparents who wished to provide financial support to their grandchildren after their death, or by parents who wished to make provision for their children in the event that they both died.

After 2006, however, much of the favourable tax treatment offered for these trusts was revoked. As such, it is more common for individuals to use discretionary trusts in these cases as they offer more flexibility. There are, however, circumstances in which accumulation and maintenance trusts may still be useful.

Maintenance

Accumulation and maintenance trusts were designed with the intention of offering a means by which minors could be provided for financially in the event that they were orphaned. Such trusts are established during the lifetime of a parent or grandparent, but are not generally funded until the death of the settlor (that is, the individual establishing the trust). The settlor appoints their children or grandchildren as beneficiaries, and also appoints a trustee; this could be either a trusted family member or friend, or an independent firm of executors.

Upon the death of the settlor, assets are transferred into the trust. From this point, the trustees are responsible for disbursing sufficient income to the beneficiaries to ensure that they are provided for financially. The amount to be disbursed may be specified in the trust instrument. This is the maintenance part of the trust.

Accumulation

At the same time, the trustees are responsible for accumulating capital through savings and investments. Again, the accepted methods of investment may be defined in the trust instrument, but it is generally accepted that low-risk investments are best in these cases. Where possible, the maintenance payments are made from investment income accrued by the trust. When the beneficiary reaches the age of 18 (or older, depending on the terms of the trust, but never older than 25), they become entitled to the full income generated by the trust. Furthermore, depending on the terms, they may also be entitled to the property itself.

Mixed Trusts

Mixed trusts, as the name suggests, are mixtures of more than one trust type. Mixed trusts are frequently used when accumulation and maintenance trusts are established for more than one beneficiary, but when the beneficiaries are of different ages. It is possible, for example, to establish an accumulation and maintenance trust for two minors, one aged 16 and one aged 14.

When the older child reaches the age of 18, an interest in possession trust might be established. The details of these trusts are covered in an article elsewhere on this site. At this point, however, the part of the trust that is for the benefit of the younger child will remain an accumulation and maintenance trust. Thus, a mixed trust is established.

As has been noted, the tax treatment of accumulation and maintenance trusts has changed significantly in recent years. As such, it is important to seek independent financial advice to decide whether or not such a trust is the right choice in your circumstances.

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