TrustsWillsDiscretionary Trusts

27 October 2017by WillPack

The Discretionary Trust is a common Trust for a Testator to use for their children to ensure that they do not inherit directly from their estate. The reasons for this can vary, for example, protecting assets from potential divorce, drinking or gambling issues, or the testators may wish that their assets are distributed in a particular manner or at certain points in their children’s lives that are outside the capabilities of the Will itself.

This type of trust is effective because the assets are held and managed by the Trustees to distribute to the beneficiaries at their own discretion, hence the name of the trust and just because a beneficiary is named under the trust does not mean that they are absolutely entitled to any assets – useful where the Trustees may have concerns over how the money may be used.  Where beneficiaries are named under the Trust; this can help to reduce the risk of Inheritance (provision for Family and Dependants) Act 1975 claims.

As the named Trustees are given complete control over the Trust it is highly recommended to not appoint just the beneficiaries as the Trustees. In some cases, such as more complex estates or families, it may be worth considering a professional such as the SWW Trust Corporation. A letter of wishes should underpin the Trust to guide the Trustees with how they wish the Trust to be run.

A Discretionary Trust is subject to the Relevant Property Regime, meaning where funds exceed the available Nil-Rate Band anniversary and exit charges will apply. Where a main residence passes into a Discretionary Trust, this would potentially lose the Residential Nil Rate Band (RNRB) as it cannot be applied to a trust of this type (unless a s89 Disabled Persons Trust, where different taxation rules apply). If the main residence does fall into a Discretionary Trust, then within 2 years from the date of the death of the Testator the Trustees could use s144 of the Inheritance Tax Act 1984 to appoint the property out to the direct descendants meaning that the RNRB can then be applied. However, caution must be used with this due to the time restraint and this can also lead to extra expense on the Estate, so where there are tax concerns the main residence should be kept separate. We will advise on this where appropriate.

A point to remember, a Discretionary Trust requires a minimum of two beneficiaries to give the Discretionary element to the Trustees. Should there be only 1 beneficiary at the time of death, the assets held by the Trust are considered to be owned by that beneficiary, therefore the assets are an entitlement of that beneficiary. This would usually be the result of specifically naming all the beneficiaries of the Trust.

However, if the beneficiaries are a class of beneficiaries, such as ‘my descendants’ this would not cause the Trust to fail in this manner. Should there ever be one remaining beneficiary of the Trust, as it is legally possible for the number of beneficiaries in that class to increase, (for example, it is possible for that child to have their own children or adopt), the Trust can continue as if there is more than one beneficiary.




by WillPack

Please note that we are only insured to provide advice to our partners. If you require any advice we would recommend contacting the Society of Will Writers on [email protected] or 01522 687888 who will be able to put you in contact with a will writer local to you.