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.
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.
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.
Back to top
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.
Back to top
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.
Back to top
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.
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.
Back to top
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
Back to top
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.
Back to top
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:
- STEP (Society of Trust and Estate Practitioners)
- CIOT (Chartered Institute of Taxation)
- CILEX (Chartered Institute of Legal Executives).
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.
Back to top
Contact Us
Call us on 0370 1500 100 or contact us online to learn more about how our solicitors can help you set up and administer a discretionary trust.
