Discretionary Trusts Explained: How They Can Help Protect Your Loved Ones and Your Legacy

Whilst some legal documents are set in stone and are relatively fixed in their nature, this is not always the case, and one example of this is discretionary trusts.

The idea of a discretionary trust is that it provides a more flexible approach to managing your wishes and distributing your assets to your beneficiaries. A discretionary trust places the power to decide with your trustees, and this can really help in situations where a touch of flexibility is needed.

A discretionary trust offers flexibility when managing assets and providing for beneficiaries. By giving trustees the ability to make decisions about how and when assets are distributed, it can help accommodate changing circumstances and individual needs.

To learn more, lets first take a look at what exactly is meant by discretionary trusts and then why you may choose to put one in place for your assets.

What is a discretionary trust?

A discretionary trust is when a trustee is in control of the distribution of all assets that are named in the trust. The beneficiaries do not have an automatic right to the funds that are within the trust instead, they hold what is known as a “potential interest” in the assets and the trustee or trustees (if there is more than one) can exercise their own discretion in the allocation.

The trustees have full control, but they are often led by a letter that is created by the person who is leaving the assets, called the letter of wishes. This provides them with guidance on how best they would like their funds to be distributed - but it is not a legally binding document.

What are the benefits of discretionary trusts?

There are a number of reasons why someone may decide to put a discretionary trust in place over another type of will or trust type. Some may even have more than one reason to take this approach. Some of the main benefits to choosing a discretionary trust are:

• They are ideal for beneficiaries who are financially unstable - if a beneficiary of a will has a tendency to make some band financial decisions or is known to have an issue with managing larger sums of money, then a discretionary trust is a useful safeguarding method. The trustee can decide to distribute the assets gradually, which means that the beneficiary can find it easier to manage their finances.

• Tax saving - compared to other types of inheritance methods, discretionary trusts can help with tax planning. By managing how the assets are distributed you can minimise the tax liabilities for both the trust and the beneficiaries too.

• Protection for vulnerable beneficiaries - if you have a beneficiary who is vulnerable, due to things like health or addiction, then you can minimise the chances that they are going to be exploited. The trustee can act in a way that allows them to spend the funds wisely and also to protect them from harmful behaviours, too.

• Safeguarding during divorces - a discretionary trust can also protect assets at a time of divorce. Since the trust owns the assets, they are not part of the personal estate of the divorcee and therefore, they cannot be a part of the divided assets during the divorce proceedings.

• Protection against creditors - another way that a discretionary trust can be beneficial is because it ensures that the assets in the trust are protected from the credit that the beneficiaries may have, should they become bankrupt, the funds are not a part of the considerations for this.

Anything else I need to know about discretionary trusts?

• A discretionary trust has a minimum of at least two beneficiaries; this is due to its discretionary nature. This can be singular or people or groups such as children. They are also subject to a relevant property regime. This means that if the value of the trust exceeds the nil rate band, then certain charges will apply.

• A discretionary trust can last up to 125 years, which means that you will need to consider who will be the default beneficiaries once this time has elapsed. Most typically this will be the heirs of the beneficiaries who were originally named but have now passed away.

• You also need to consider if a main residence is left in a trust, then the Residence Nil Rate Band may not apply. However, if the property is transferred to direct descendants within two years of the death of the owner, then it can be recovered.

Discretionary trusts involve important considerations, including beneficiaries, tax charges, the length of the trust and how property is treated. Understanding these rules can help you make informed estate planning decisions.

In summary, a discretionary trust can be a hugely valuable part of your estate planning strategy. They offer control that is flexible and a long-term protection plan for your assets. They will ensure that your loved ones are always looked after within your set out wishes.

If you want to try and create one for yourself, then get in touch with us here at Citywide Wills, as experts in trusts and wills we can make sure that everything you have worked so hard for, is protected in the best way possible.