Chartered Institute of Stockbrokers (CISI) Professional Practice Exam

What type of trust allows beneficiaries to receive income during their lifetime while passing on the capital after their death?

1. Interests in possession trusts

2. Discretionary trusts

3. Accumulation and maintenance trusts

4. Fixed trusts

The correct answer is: Interests in possession trusts

The correct answer is Interests in possession trusts. This type of trust is designed to give beneficiaries the right to receive income generated by the trust assets during their lifetime. The key characteristic of an interests in possession trust is that while the beneficiaries can enjoy the income (such as dividends or interest) from the trust, the capital itself is preserved for others, typically specified as remaindermen, who will inherit the trust assets after the death of the beneficiaries. This arrangement is particularly beneficial in estate planning, allowing for immediate financial support to beneficiaries while ensuring that the main assets are safeguarded for future generations. In contrast, other types of trusts may offer different handling of income and capital. For instance, discretionary trusts allocate income and capital at the trustee’s discretion, not guaranteeing income to any specific beneficiary. Accumulation and maintenance trusts focus on accumulating income until the beneficiaries reach a certain age, and fixed trusts distribute both income and capital according to predetermined shares.