Our solicitors are experienced at setting up and administering discretionary trusts. Here we’ve answered some common questions about them.
If you’d like to talk to us more about setting up a trust, contact us today to arrange a meeting with our experts.
What is a discretionary trust?
A discretionary trust gives trustees the power to decide how much beneficiaries get from a trust and when they get it. All capital and income are distributed completely at their discretion.
Discretionary trusts give greater power to trustees to decide how and when to give funds to beneficiaries. This can be useful for estate planning and save assets from being depleted unnecessarily.
This means there’s more flexibility and assets can be protected if circumstances change for any reason.
It’s best to write a detailed letter of guidance for the trustees to help them make these decisions in accordance with your wishes.
What is the difference between discretionary trusts and other types of trusts?
One of the main differences between a discretionary trust and other trusts is the discretion over how and when assets are distributed to beneficiaries the trustees' have.
The trustees in a discretionary trust have the power to decide which beneficiaries will receive the income and when.
When can I set up a discretionary trust?
You can set it up during your lifetime or write it into your Will to come into effect after your death. If you set it up while you’re still alive, be aware that it may be liable for inheritance tax if you die within 7 years.
Any lifetime gift into trust that exceeds the inheritance tax threshold of £325,000 will be taxed at 20%. There may be the opportunity to take advantage of other tax relief – we’ll be able to advise you whether this is the case.
Read more about creating a trust in your Will.
When should a discretionary trust be used?
A discretionary trust should be used when flexibility is key, for example:
- When there's uncertainty about beneficiaries' needs - if you're unsure about which beneficiaries will need financial support in the future or if each beneficiary will have different needs at different times, this trust allows you to distribute funds based on evolving needs.
- Complex family situations - when there are multiple beneficiaries with differing needs or there a potential conflict of interests. A discretionary trust allows you to make decisions that are fair.
- Protecting assets - discretionary trusts can help you protect assets from divorce settlements, creditors, or being mismanage by beneficiaries who aren't financially responsible.
- Future generations - discretionary trusts can be used to help provide for future generations of your family, even if they haven't been born.
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Who can be a beneficiary?
You can choose anyone to be a beneficiary. They might be:
- Named individuals
- Classes of people, such as “my grandchildren and their descendants”
- A charity, or a number of charities
- Other organisations, such as companies or sports clubs
It’s possible for people who haven’t yet been born to be beneficiaries – this allows you to plan for future grandchildren and other descendants.
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Can a trustee be a beneficiary?
Yes – although in the interests of the trust, it’s good practice to ensure:
- There’s no conflict of interest between someone’s role as a trustee and their position as beneficiary
- At least one trustee is a non-beneficiary
Discretionary trusts by their very nature place a lot of power in the hands of the trustees. For this reason, it’s important to make sure there’s at least one person in charge who doesn’t have a financial interest in the trust.
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What are the benefits of a discretionary trust?
Discretionary trusts can be very useful in a number of circumstances. They can be tailored to suit the needs of you and your family and benefit your estate as a whole. Some of the advantages to discretionary trusts are your:
- chosen trustees still have control of your estate even after you've passed away
- intended beneficiaries will benefit from the trust at a suitable time
- trustees can assess the current circumstances of the beneficiary at the time they are supposed to receive any assets
- trustees will also be able to check the tax position of your trust at the time of your death.
They are valuable as a way to protect assets for beneficiaries who don’t have the ability to manage their own funds. These might be:
- Children
- Those who have an illness or disability that affects their capacity
- Those who might make poor life choices or come under unsuitable influences or addictions
The trustees can make changes to what the beneficiaries get from the trust, as and when it becomes appropriate.
Discretionary trusts can sometimes be used to keep assets away from business creditors or a divorcing spouse.
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How can a discretionary trust help with inheritance tax?
Discretionary trusts can be a tax-efficient solution when passing on wealth to your beneficiaries, ensuring that:
- They’re not left with a large inheritance tax bill
- Their entitlement to state support or benefit isn’t affected by their inheritance, for example disability support or help with care home fees
Discretionary trusts are also valuable when considering how to pass on property. They can help you:
- Take advantage of inheritance tax business or agricultural relief, which otherwise might not be available after both you and your spouse have died
- Put assets outside your spouse’s ownership that are expected to increase in value and attract more tax (for example, land with development potential)
- Discount the taxable value of your family home by splitting ownership between a surviving spouse and a trust
- Get extra inheritance tax allowances if either you or your spouse (or both) have previously been widowed
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When can I set up a discretionary trust?
You can set it up during your lifetime or write it into your Will to come into effect after your death. If you set it up while you’re still alive, be aware that it may be liable for inheritance tax if you die within 7 years.
Any lifetime gift into trust that exceeds the inheritance tax threshold of £325,000 will be taxed at 20%. There may be the opportunity to take advantage of other tax relief – we’ll be able to advise you whether this is the case.
Read more about creating a trust in your Will.
Why choose Irwin Mitchell for this service?
Our team are experts in all aspects of estate planning, as well as having teams of tax specialists and financial advisers. We also have a dedicated trust administration team who can both set up and manage trusts.
We hold membership of many professional bodies in this area, such as:
We work with these bodies to help shape the law in this fast-moving area.
Our team also have experience working with international clients and high-net-worth clients. No matter where you're located or what your status is, our team can help.
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Contact us
Call us on +44 (0)370 1500 100 or contact us online to learn more about how our solicitors can help you set up and administer a discretionary trust.
