What are discretionary trusts?

A discretionary trust provides trustees with full control over the allocation of your inheritance to a number of potential beneficiaries. You must specify a minimum of two potential beneficiaries to allow the trustee to exercise their discretion.

Trustees have full discretion over when trust beneficiaries receive any of the trust fund or the trust assets. Due to the nature of discretionary trusts, it is common practice to leave a letter of wishes to give your trustees guidance on how you intended the trust funds to be allocated. It’s important to realise, however, that the trustees are under no obligation to follow these wishes.

There are a range of reasons that this type of trust would be useful to you, for example:

  • It can protect those who will benefit from the trust if they are financially unstable, as it allows the trustees to exercise control over if and when they drip feed the funds to them
  • It can protect potential beneficiaries who are mentally vulnerable, through disability or addiction and would struggle to manage the trust alone
  • It can protect money in trust until your child(ren) reach the age where they can be financially responsible for the inheritance
  • It can protect money from those beneficiaries who are expected to divorce, as the trust funds will not legally belong to them, but the trustees

What are the benefits of a discretionary trust?

Discretionary trusts are often popular as they provide flexibility when providing for your family in the event of your death. There are a number of benefits to setting up a discretionary trust, as per the below:

  • Trust funds are protected from the potential beneficiaries, to prevent frivolity
  • Your funds and assets will also be protected from parties who have an interest in your beneficiaries’ finances, for example creditors, ex-partners and the Government (for example, when considering benefit payments or access to social care)
  • You can define within the terms of the trust how you would like the trustees to distribute your trust assets 

What are the negatives of a discretionary trust?

It’s incredibly important to ensure when setting up your trust, that you have complete faith in those that you pick as trustees. Due to the nature of the trust, your appointed trustees will have greater powers over trust property, therefore you want to ensure that they will act in line with your preferences. 

This type of trust may not be the most tax efficient way to leave your inheritance, so it’s important that you fully understand the tax laws and implications before making a decision about your trust.

How do I set up a discretionary trust?

It’s important that you approach a professional who is experienced in the organisation of wills and trusts, to ensure that you maximise the potential benefits of your discretionary trust. They will draw up the terms of the trust, which can either take effect whilst you are still alive, or form part of your will. 

Should I create a discretionary trust as part of my estate planning?

It is possible to use this type of trust as a part of your estate planning, either during your lifetime or included in the terms of your will. 

If assets are transferred into a trust in your lifetime, you should consider that if you die within seven years of transferring the property to trust, it may still be liable for inheritance tax. 

Have I left it too late to create a discretionary trust?

This will depend on your intended purpose for setting up a discretionary trust. Providing you have mental capacity you can either write it into your will to take effect only if you die, or you can transfer assets to trust in your lifetime. 

Regardless of whether you set up the trust in your lifetime or in your will, you should give careful consideration to any immediate or ongoing tax implications.

How can Expression Wills help me with my discretionary trust?

Here at Expression Wills, we specialise in wills and trusts, so our expert advisers can ensure that you maximise the benefits and minimise any negatives that would arise from the creation of a discretionary trust. We understand that inheritance can be a confusing subject, so we pride ourselves on providing concise and jargon free advice about inheritance and estate planning.

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Laura and Dave

Claire has been really helpful throughout the process. She was particularly supportive in helping us decide who to appoint as guardians and trustees and gave us lots of insightful information to help us make the right decision for our family. We have been really happy with the service and would highly recommend Expression Wills.

thomas templar

I used Expression wills to take out my first will, Claire was very knowledgeable and the process was effortless. I would highly recommend Claire and Expression wills to anyone who needed a will.

Craig Brewer

Had wills completed for myself and my partner, we were already stressed as this was in the middle of our house purchase/sale but Claire made the whole process a breeze. Very informative and helpful every step of the way. Would definitely recommend to anybody thinking of getting a will done