What is a Discretionary Trust?
Discretionary trusts are an incredibly flexible trust that you can include in your Will. They have many benefits both for protection and inheritance tax (IHT) planning. They can be used to protect all of your assets or just some of them. This type of trust is incredibly useful if you’re worried about how the people you want to inherit will manage that inheritance, or even if you’re just not sure what exactly each person will need in future.
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In simple terms they work by leaving assets in the control of your Trustees. You name a group of people, and this can be anyone, who you would like to benefit from your assets. The people you choose to benefit can be named individuals, or we can make it more flexible by naming groups of beneficiaires like “my descendants”. This means the trust could be used to benefit your children, your grandchildren, and so on down your bloodline.
Since the Trustees have control they will decide who benefits, how much, and how often. For example, they may decide to give one of your children £10,000 towards their first home, and another £15,000 to start their business. They may also use the money in the trust to do things to support the beneficiaires rather than making outright gifts to them. Maybe one of them needs some help with rent? The trustees could cover this for them instead of paying lump sums to them.
The trust can last for up to 125 years, making them a great option if you want to include some very long term planning in your Will. This is exactly why saying the beneficiaries are “my descendants” rather than naming people is a flexible option – you can use the trust to benefit people who aren’t even born yet.
Flexibility is definitely the main benefit of the discretionary trust. You can leave any assets to this type of trust and keep a lot of control over how they are used to provide for and support your beneficiaries once you are gone. The possibilities are almost endless, but you could consider using this trust to:
- Defer when your children inherit until they reach a certain life milestone like marriage, being clear of bankruptcy, finalising their divorce, or finishing their higher level education.
- Generation skip. Maybe your children are adults now and well established in their life and careers, so you’d like the trust to be used to set their children up in life and get them off to a head start.
- Provide different levels of support to your children. It might not be clear now how much support each of them will need in future, so this trust leaves decisions about this to your Trustees. It could be that one child needs very little while another could benefit from a great deal more support.
- Provide for someone without affecting any means tested benefits they rely on.
Another huge benefit of the discretionary trust is that you can leave assets to people who you otherwise might have been concerned would squander or misuse them. In a way this trust doesn’t just protect your assets, it also protects your beneficiaries. If you have a child who is unable to manage their own finances then placing control of their inheritance in the hands of your Trustees is in that child’s best interests. This could be because the child is simply bad at managing money, or even because they have an alcohol or gambling addtiction that you want to avoid funding. An extra layer of benefit in these cases is that the Trustees could even use the money in the trust to support the beneficiary in getting the help they need, and release their share of the trust to them once they’re confident they’ve recovered.
Ultimately the Trustees have total discretion and will make all decisions about managing the trust. We recommend you give your Trustees some guidance on how you want them to manage the trust. This can be done in the form of a ‘Letter of Wishes’, which we can advise on and produce for you. The Trustees should try to follow this letter as closely as they can whenever they are making decisions about how to use the trust.
You can update these wishes at any time without needing to rewrite your will, so don’t worry if you change your mind.