Discretionary Trusts

When we die, we all hope that our loved ones will be looked after properly. The best way of doing this is by making a Will.

In making a Will you have the chance to put in place something known as a trust. This is a legal arrangement that provides a way to protect the assets held in it so that the beneficiaries receive all the benefits. In setting up a trust, there are different types of trusts that can be formed. One of these is the ‘Discretionary Trust’.

What is a Discretionary Trust?

A Discretionary Trust is a way for someone making a Will to leave assets in a trust so that it benefits family and loved ones. Unlike other trusts it has the most flexibility as it allows trustees the freedom to decide how to distribute the assets. There is no pressure on them to distribute the assets according to any fixed instructions. Instead, they can use their discretion as to how best the trust can support the beneficiaries.

Why should I use one?

While everyone’s circumstances are different, there are occasions when a trust, particularly a Discretionary Trust might be appropriate. Such a trust makes it possible to plan for and manage any tax liabilities the estate might have such as inheritance tax for example. Another reason is where the beneficiary may not be able to handle the income. Since the trustees have flexibility in deciding how to distribute the trust they can instead choose to let the income build up in the trust and allocate it at a later date. A good example of this is where the beneficiaries are children. Since they may be too young to receive the money the income can be allowed to build up and allocated to them at a later date by the trustees.

Who should be the trustees?

Since it is the trustees who decide how to use the assets in a trust, you need to think carefully about whom you appoint. If your estate is complex or has a high value you may want to consider appointing trustees who are independent.

What are the tax implications?

Discretionary Trusts do have tax implications. The main ones are inheritance tax and income tax. Depending on the estate there may be others. With a Discretionary Trust, it can help plan for and manage inheritance tax liabilities in the best way that is legally possible. A trust will also have to pay income tax on the income it creates.

Where next?

If you decide to set up a trust it is important that you get legal and financial advice. This ensures that the Discretionary Trust is established correctly and provides the protection you want for your loved ones.