Discretionary Trusts

By including a Discretionary Trust in your Will, you can ensure that not only any provision you want to make to a financially vulnerable beneficiary will be used to enhance their way of life, but will also at the same time ensure that other members of your family or other beneficiaries will also benefit.

By setting up a Discretionary Trust in your Will, the future security of any beneficiary who is unable to look after their own affairs is protected.

This Trust will be managed by the Trustees that you have appointed in your Will, and as a Discretionary Trust is flexible, it places the decisions with your Trustees over which of your beneficiaries will benefit, when they will benefit, and how they will benefit.

There are a number of reasons why you may wish to include a Discretionary Trust in your Will, these may include, but are not limited to the following instances:

• If you are intending to benefit a person who may be financially vulnerable whether because of a disability, entitlement to means tested benefits, being at risk of divorce or bankruptcy, or simply irresponsible for money.
• If you are intending to benefit a person who is wealthy in their own right and are concerned of increasing their estate for inheritance tax purposes.

Frequently asked questions

What is a Trust?

A Trust is a legal arrangement whereby assets, money, investments or property are managed by one or more people (known as “Trustees”) and their obligations and how they are to benefit the beneficiaries, will be set out in your Will or Trust Deed.

How does the Discretionary Trust work?

The most common use of a Discretionary Trust is to provide for a beneficiary who may be financially vulnerable. It is important to note that the assets put into a Discretionary Trust do not ‘belong’ to any beneficiary of the Trust. A beneficiary may only request funds or assets from the Trust via the Trustees, and the Trustees will then have the discretion in how to benefit these beneficiaries.

This means that the capital held in the Trust is not taken into account when assessing that beneficiary’s entitlement to state benefits such as income support, nor is it taken into account in respect of any Local Authority means testing assessments.

The appointment of specific Trustees, and how you clarify your intentions in how the Trust is to operate, is crucial. It is therefore recommended that you prepare a Letter of Wishes to accompany your Will to provide guidance and instructions to your Trustees on how you wish the funds in the Discretionary Trust to be managed.

What are "Trustees"?

The position of a Trustee is one which requires honesty and good faith. A Trustee will act for a long time and it can be a demanding role.

They will need to communicate with your beneficiaries, make decisions on investments, and ensure all other legal obligations are carried out.

If you are choosing to appoint a friend or family member as your Trustee, you must appoint at least two to act together. You must also be able to trust them to always act impartially towards all your beneficiaries.

If you are not confident that your loved ones will be able to do this or you are concerned that the task may be too onerous for them, you can choose to appoint a professional Trustee, such as a Solicitor or Accountant . They will be able to act alongside your loved ones as an impartial party who will manage your estate sensitively and efficiently.

What is a Letter of Wishes?

The Letter of Wishes is there to outline the reasons why you set up the Trust and how you wish the assets in the Trust to be used.

It is advisable to include in the Letter of Wishes, when you intend the Trust to be brought to an end and how you wish the funds to be distributed, when it does.

The Letter of Wishes is not binding on your Trustees as it is a statement of your wishes and is there to provide guidance to your Trustees. This letter should always be kept with your Will.

Please note, that unless your Estate is over the Inheritance Tax limit, Inheritance tax will not be payable. Capital Gains Tax will be payable at a higher rate for interest, but the Capital Gains allowance of the beneficiary, can be set against this if any asset is transferred.

With regard to income tax, a Trust does have to pay income tax at a higher rate on any income the assets earn and is subject to Capital Gains Tax and inheritance taxes in its own right without the reliefs that may be available to the beneficiary direct or under a disabled persons or bare trust. These also in most cases can be mitigated however by the payment out of the income of the trust to the beneficiary.

It is very difficult to provide advice on what the annual costs of running the Trust would be if professional Trustees were to be appointed; however, any legal costs charged must be reasonable and can be challenged by the beneficiaries.

The information above sounds complicated, but Discretionary Trusts are in fact quite common and are very flexible.

Should you require any further information or wish to make an appointment to discuss preparing a Will to include a Discretionary Trust, please call our team on 01443 565693.