How To… Set Up a Discretionary Trust


What is a discretionary trust?

A discretionary trust is one in which those in charge of managing the trust have full discretion as to who benefits from it and more specifically when. They are known as the 'trustees' and have control over the assets in the trust and any income made from these assets.

Wills and Probate

As the settlor, the person who created the trust, you should leave a letter defining your wishes which clearly states the trustee's powers.

Why should I set up a discretionary trust?

Discretionary trusts are often used when the settlor wants someone to benefit from the trust but they are not capable or responsible enough to do so themselves. It also offers a certain level of flexibility that other types of trusts don’t such as when and how the assets are distributed.

They are also sometimes set up to put capital aside for unknown future needs such as paying for a child to go to university or a wedding. Trustees can also use the income when needed to benefit the beneficiaries but again this is down to the discretion that they are given under the trust. They may be allowed to release the income when they see fit and control the amount that is given out.

For example, Elsa has put money into a discretionary trust for her 7 year old granddaughter Cathie. The trustees would be able to decide how to use the money and any interest earned for Elsa’s granddaughter. This may include things such as violin or horse riding lessons when they are young all the way up to paying for her wedding.

What is the role of the trustee?

The role of the trustee is to do what is best for the beneficiaries. This may include distributing capital instead of paying out income to avoid additional income tax charges or winding up the trust and distributing all assets to reduce costs to both the trustees and the beneficiaries.

In some cases the trustee is allowed to add the income made on the trust to the capital. This is called the power to ‘accumulate’ income.

The income generated by a discretionary trust is subject to income tax. This must be paid by the trustees but is subject to a special rate.

Why do I need a solicitor?

Due to the wide ranging powers that trustees have, it is important to have a solicitor write your discretionary trust. This can either be contained in your will or within a trust deed. A trust deed sets out the conditions of the trust.

When setting up a trust, it is always important to ensure that your wishes after you pass away are fulfilled and this can only be done with careful and considerate drafting done by a professional.

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