There are two ways to set up a discretionary trust: i) in your lifetime and ii) in your will.
A trust generally is any arrangement whereby selected assets are transferred to trustees of your choosing who have a responsibility to look after and manage the assets for the benefit of the named beneficiaries. A discretionary trust is a type of trust where the trustees are given discretion over the trust fund.
Typically, whilst you would choose the class of beneficiaries eligible to benefit from the fund, your trustees would have complete discretion over which beneficiaries get paid what and when, and they would have the power to decide how to use and invest the trust assets in the interests of the beneficiaries.
If you decide to set up a discretionary trust, we would recommend that you prepare a 'letter of wishes' addressed to the trustees setting out how you would like them to exercise their discretion (we would prepare this on your behalf). Although not legally binding, your trustees would be able to take this into account when exercising their discretion.
Reasons for setting up a discretionary trust might include:
Flexibility to enable your trustees to pay different amounts of income and/or capital to different beneficiaries. This can be useful if the future needs of beneficiaries are not known e.g. differing school fees for grandchildren.
If one or more beneficiaries are not capable of looking after money for themselves e.g. a child or adult beneficiary with severe learning disabilities.
Protecting selected assets from claims and creditors. If any beneficiaries are subject to proceedings, including divorce and bankruptcy, a discretionary trust will usually offer protection from third party claims.
If any beneficiaries are in receipt of means tested benefits, a discretionary trust will enable your trustees to pay money to them as and when required in such a way that the arrangement will not affect the beneficiary’s entitlement to benefits. This is because no beneficiary would have an absolute interest in the trust fund.
Ensuring that the trust fund is kept outside your beneficiaries’ estates for inheritance tax purposes so that when a beneficiary dies, the trust fund is not subject to any inheritance tax which may be due on their estate.
Keeping the trust assets within the family and future generations.
Please note that discretionary trusts are required to pay tax on income and capital gains like individuals. There may also be small inheritance tax charges throughout the lifetime of the trust, namely anniversary charges which arise once every 10 years and exit charges payable on distributions made to beneficiaries.
Please note that if you decided to set up a discretionary trust in your lifetime, there may be an immediate inheritance tax charge depending on the amount placed into trust.
If you have any further questions in relation to discretionary trusts, please contact the Private Client team on 01992 422 128 and we will be happy to assist with any queries you may have.