Trusts have a variety of different uses in wills. Most of these are relatively well known by will writers, however there are times where very specific facts could warrant the use of a trust. In this regular feature of the newsletter we will cover situations where a trust could be recommended to a client that you might not have thought of.
This week, we will look at a situation where you may consider using a discretionary trust where a testator is wishing to make regular payments to a beneficiary.
Mrs McDonald wishes to leave her estate equally to her son and daughter. She is happy for her daughter to inherit outright, however she instead wishes to stagger her son’s inheritance and provide him with a regular income of £20,000 a year.
What’s the problem?
Mrs McDonald could consider using an annuity trust for this. Her son’s inheritance could pass to this and it would specify that the trustees should provide him with an income of £20,000 for the rest of his life or until the capital is depleted. They could do this either by using the trust fund to purchase an annuity or by managing and investing the capital themselves.
Using an annuity for this does lack any flexibility, for example:
- It may come a time where £20,000 is not a sufficient amount due to inflation.
- It may be inadvisable for the son to retain an income in the future, for example if he goes bankrupt.
- The son may have good reason to need additional funds from the trust.
Rather than place the son’s inheritance into an annuity trust, a discretionary trust could be considered instead. The trust should name the son and others (perhaps his descendants) as potential beneficiaries.
Under a discretionary trust, the trustees will have the discretion to benefit the beneficiaries as they see fit. A letter of wishes could be drawn up to guide the trustees on how they should exercise those powers, although this won’t be binding on them. It could detail that the client’s wishes of £20,000 pounds per year but it can also detail circumstances in which the trustees could vary this amount or provide additional funds from the trust.
The use of a discretionary trust would mean that the son’s inheritance is dependent on the discretion of the trustees rather than guaranteed as is the case with the annuity trust, but it would allow for additional flexibility.
If you would like any further advice on this, please don’t hesitate to contact us at [email protected].