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Discretionary Trusts

As the name suggests, these trusts allow the appointed Trustees discretion as to which beneficiary is to be paid, how much to pay, when to pay and whether any conditions should be imposed upon a beneficiary. 


These Trusts are extremely useful, especially where an intended beneficiary is a person at risk of the following: 


  • Possible divorce 

  • Possible bankruptcy 

  • Vulnerable to outside influences (not registered disabled or due to a mental health condition as defined by the Mental Health Act 1983 – see below) 

  • Irresponsible or incapable of managing such finance (e.g. due to age or substance misuse) 


Where a beneficiary is registered disabled or is considered a vulnerable beneficiary within the definition given here: - Trusts and taxes: Trusts for vulnerable people - GOV.UK (www.gov.uk) please see my article next week about Trusts for Vulnerable beneficiaries. 


The trustees of a Discretionary Trust will have full discretion as to when and in what circumstances a beneficiary might receive funds from the trust.  This allows for a beneficiary to receive funds in “trickle” fashion so they don’t blow the lot! 


Trustees can also be beneficiaries BUT beware that trustees have a legal duty to act in the best interests of the trust as a whole and not just for their own interests.  It is best to include at least one independent trustee who is not also a beneficiary to ensure fairness. 


Ther person setting up the trust is called a settlor (if the trust is created during their lifetime) or the testator (where the trust is created by Will). 


The settlor/testator should, in addition to the Trust Deed or Will, compile a “letter of wishes” which sets out how they wish the trustees to act and their main objectives and priorities for the payment of trust funds.  It should also provide guidance to the trustees as to how and when they should use their discretion.  This letter of wishes provides useful instruction and explanation for the trustees, especially in circumstances where the beneficiary may be disappointed or upset by not being able to inherit everything straightaway.  

 

There are some disadvantages to discretionary trusts that testators should be aware of.  For example, where the family home is put into a discretionary trust, the tax relief known as the residence nil rate band, may not apply as the beneficiaries are not immediately entitled to possess the asset on the death of the testator.  There are other tax implications to consider too, such as Inheritance Tax, Capital Gains Tax, Income Tax and 10-year anniversary and exit charges for trusts, not to mention the potential requirement to register the trust with the Trust Registration Service.  Tax relating to trusts is a complex area and subject to regular review.  Before creating any trust either as a settlor or testator of a Will, it is important to obtain full tax advice from a financial advisor as well as legal advice. 


If you wish to discuss discretionary trusts in more detail, please contact us for further advice. 

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