What is a Discretionary Trust and How Does it Work?
A Discretionary Trust allows you to put some or all of your Estate into a Trust, which can then be distributed to all or any of your beneficiaries by your appointed Trustees when they feel it is appropriate.
By setting up a Discretionary Trust, you are empowering your appointed Trustees to manage your Estate and decide at their discretion, how, when and who to distribute it to.
It's just one example of a Trust that you can set up when making a Will, and it's an effective flexible way of leaving assets to grandchildren or protecting family wealth for generations to come.
A Discretionary Trust calls for legal and tax knowledge. Our specialist team of Wills and Trusts Solicitors will use their expertise to ensure you are fully advised of the implications and your wishes are carried out.
For initial legal advice get in touch with our Wills and Trusts Solicitors.
How Does a Discretionary Trust Work?
In England and Wales, a Discretionary Trust can be set up by an individual or couple (called the Settlor or Settlor's) who then appoint two or more Trustees to manage the assets for a number of potential beneficiaries.
You can set up a Discretionary Trust during your lifetime, or you can write it into your Will so that in the event of your death, your wishes are actioned.
As Settlor, you can prepare a Letter of Wishes alongside your Will. This effectively serves as instructions to your appointed Trustees advising them on when, and in what circumstances your beneficiaries should receive assets. However, a Letter of Wishes is not a legally binding document, and your Trustees are by no means legally bound to abide by its contents. They can still act at their discretion, for example, if they feel a beneficiary is not responsible enough to receive the assets.
Why is a Discretionary Trust Useful?
A Discretionary Trust can be useful in many ways, such as:
- You might be unsure how you want your wealth to be distributed between groups of beneficiaries after you die. Leaving this decision up to people you trust can be helpful.
- You may have a beneficiary who is in receipt of means-tested benefits. Leaving assets in a Discretionary Trust means such a beneficiary can benefit from the Trust, as and when the Trustees deem this appropriate, without losing their entitlement to benefits.
- You may have a beneficiary who cannot manage their own financial affairs. Leaving assets to them in a Discretionary Trust rather than outright can help circumvent the need to get a Deputy appointed to manage an inheritance received.
- It can also offer protection from creditors, meaning assets cannot be taken in the event of bankruptcy or liquidation.
- It can provide a safer way to provide for a vulnerable client to protect them from exploitation.
Discretionary Trusts are popular because they offer a flexible way for you to provide for your family in the event of your death.
Easier Said Than Done?
Despite the many benefits to Discretionary Trusts, they are complex legal documents and we would advise that you get help from a specialist Wills and Trusts Solicitor to set one up.
It’s important to remember that you are putting your wealth in the hands of other people who you must trust and who will distribute your wealth in accordance with your wishes. The Trustees have the discretion to not pass on those assets to a beneficiary if they feel that is the right thing to do. This could be for a variety of reasons to include the fact that the proposed beneficiary may:
- Be an addict who would be wasteful with their inheritance, or it could do them more harm than good.
- Be in a relationship with someone who may influence or exercise control over that inheritance.
If you don’t feel comfortable appointing anyone you know to be your Trustees, you can appoint our Solicitors to act as your Trustees.
Discretionary Trust and Inheritance Tax
Any assets put into a Discretionary Trust that exceeds the Inheritance Tax threshold of £325,000 will be taxed at various points in the life of the Trust including:
- On creation for lifetime transfers at the rate of 20%.
- On each 10th anniversary of the Trust at a maximum of 6%.
- When payments of capital are made to beneficiaries or assets are taken out of the Trust.
Discretionary Trusts set up in a Will are subject to the anniversary and exit charges if distributions are not made within 2 years from the Settlor’s date of death and this can be used to maximise reliefs and exemptions to inheritance tax.
How Simpson Millar Can Help You
Our specialist Wills and Trusts Solicitors can help you set up a Discretionary Trust and make it as tax-efficient as possible.
We can advise on legal implications you may be unsure of, update you on changes to tax laws, make alterations where necessary and provide advice in all areas of compliance.
So, if you’re considering your future and what happens to your assets (everything you own) after your death, we want to make the process of making a Will and setting up a Trust as easy as possible.
For free legal advice call our Probate Solicitors
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