Estate planning is an essential part of securing your family’s financial future, ensuring that your assets are distributed according to your wishes. One of the most flexible and versatile tools available for managing and protecting wealth is a Discretionary Trust. Whether you’re looking to safeguard assets for future generations, minimise inheritance tax, or provide financial support for vulnerable beneficiaries, a discretionary trust may be the right solution for you.
At Blackstone Solicitors, we assist clients across England and Wales in setting up trusts tailored to their individual needs. This comprehensive guide will explain what a discretionary trust is, who can benefit from it, and how it might work in your estate planning.
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What is a Discretionary Trust?
A Discretionary Trust is a legal arrangement where trustees hold and manage assets for the benefit of one or more beneficiaries. However, unlike other types of trusts, the beneficiaries do not have a fixed entitlement to the trust’s assets or income. Instead, the trustees are given the discretion to decide which beneficiaries receive income or capital from the trust, how much they receive, and when they receive it.
This flexibility makes discretionary trusts a popular option for those who want to provide financial support for their beneficiaries but wish to retain control over how and when the assets are distributed.
Key Features of a Discretionary Trust
- Discretionary Powers of Trustees
In a discretionary trust, trustees have significant control over how the trust assets are distributed. They can choose which beneficiaries to support and determine the amounts and timing of distributions based on the trust’s terms. This flexibility is particularly useful if beneficiaries have changing financial needs or if you want to protect assets from being accessed too early. - Beneficiaries Not Automatically Entitled
Beneficiaries of a discretionary trust do not have an automatic right to receive income or capital from the trust. The decision to distribute trust assets lies entirely with the trustees, who must act in accordance with the trust deed and take into account the settlor’s wishes. - Trustees’ Responsibility
Trustees have a fiduciary duty to act in the best interests of the beneficiaries. They are responsible for managing the trust assets and making decisions about distributions. Trustees must also ensure that the trust complies with legal requirements, including tax obligations. - Letter of Wishes
When setting up a discretionary trust, you may also provide trustees with a “Letter of Wishes.” Although this is not legally binding, it guides the trustees on how you would like them to manage and distribute the trust’s assets. The trustees are not required to follow this letter, but it helps ensure that your intentions are understood.
Who Can Set Up a Discretionary Trust?
Anyone who owns assets, such as property, savings, or investments, can set up a discretionary trust. The person creating the trust is known as the “settlor.” Typically, discretionary trusts are used by individuals who wish to:
- Protect assets for future generations
If you have concerns about your beneficiaries’ ability to manage large sums of money, setting up a discretionary trust allows you to safeguard your assets while still providing financial support. - Provide for children or vulnerable beneficiaries
If you want to provide for children, individuals with disabilities, or vulnerable beneficiaries, a discretionary trust allows you to control how and when these beneficiaries receive financial support. This prevents assets from being mismanaged or used irresponsibly. - Manage inheritance tax (IHT)
Discretionary trusts can be useful in inheritance tax planning. By transferring assets into a trust, you may reduce the value of your estate, helping to minimise IHT liabilities. However, the tax treatment of trusts is complex, so it’s essential to seek professional advice.
At Blackstone Solicitors, we regularly work with clients to set up discretionary trusts as part of their estate planning strategy, ensuring that their assets are protected and passed on in the most tax-efficient way possible.
How to Set Up a Discretionary Trust
Setting up a discretionary trust requires careful planning and expert legal advice. Here’s a step-by-step guide to the process:
- Identify the Assets
First, you’ll need to decide which assets to place into the trust. These could include property, cash, investments, or other valuable assets. It’s important to ensure that the assets you transfer to the trust are fully owned by you and free from any legal encumbrances. - Choose Your Trustees
Trustees are the individuals or organisations responsible for managing the trust. You can appoint family members, friends, or professional trustees such as solicitors or accountants. It’s important to choose trustees who are trustworthy, financially responsible, and capable of managing the trust’s affairs. - Draft the Trust Deed
The trust deed is the legal document that sets out the terms of the trust. It will specify the beneficiaries, the powers of the trustees, and the rules for managing and distributing the trust’s assets. You should also consider including a Letter of Wishes to guide your trustees on how you want the trust to be managed.
At Blackstone Solicitors, we can help draft a trust deed that reflects your specific wishes and provides clarity for your trustees.
- Transfer the Assets
Once the trust deed is finalised, the assets must be transferred into the trust. This involves changing the ownership of the assets so that they are held in the name of the trust. For property, this will involve updating the title with the Land Registry, and for other assets, you will need to notify relevant institutions, such as banks or investment firms. - Register the Trust
Since 2017, many trusts in the UK are required to be registered with HMRC’s Trust Registration Service (TRS). Failure to register a trust can result in penalties, so it’s important to ensure that the trust is properly registered. The registration process also involves providing detailed information about the trust, including the identities of the trustees and beneficiaries.
Benefits of a Discretionary Trust
Discretionary trusts offer several advantages for those looking to protect their wealth and provide for their loved ones:
- Flexibility
The discretionary powers of trustees mean that the trust can adapt to changing circumstances. If beneficiaries’ needs change over time—such as in cases of illness, financial hardship, or other life events—the trustees can make distributions that reflect these changes. - Protection from Creditors
As the beneficiaries do not have a fixed entitlement to the trust’s assets, the trust can protect assets from being claimed by creditors or included in divorce settlements. This is particularly useful if you have concerns about a beneficiary’s financial stability or personal situation. - Control Over Distribution
You can retain a level of control over how your wealth is distributed by selecting trustees you trust to act in the best interests of your beneficiaries. You can also include specific instructions in your Letter of Wishes to guide trustees on the timing and nature of distributions. - Inheritance Tax Planning
Discretionary trusts can help reduce the inheritance tax burden on your estate, particularly when combined with other estate planning strategies. By moving assets into a trust, you can reduce the overall value of your estate and potentially save your beneficiaries from paying significant amounts in inheritance tax. However, it’s important to remember that trusts themselves may be subject to periodic tax charges, including the “10-year anniversary charge.”
Disadvantages of a Discretionary Trust
While discretionary trusts offer many benefits, they may not be suitable for everyone. Some potential drawbacks include:
- Trustees’ Discretion
Since trustees have full discretion over the distribution of assets, beneficiaries have no guaranteed entitlement to receive anything from the trust. This lack of certainty may be a disadvantage for some individuals. - Ongoing Costs and Administration
Trusts require ongoing management, which may involve professional fees if you appoint solicitors or accountants as trustees. There are also tax returns and other administrative duties that must be fulfilled, adding complexity to the process. - Potential Tax Charges
Discretionary trusts are subject to their own tax regime, which includes income tax, capital gains tax, and inheritance tax. There are also periodic tax charges that apply every 10 years, which could impact the value of the trust’s assets.
Is a Discretionary Trust Right for You?
Discretionary trusts offer a flexible and powerful tool for protecting wealth and providing for your beneficiaries. Whether you are concerned about protecting your assets from creditors, providing for vulnerable family members, or managing inheritance tax liabilities, a discretionary trust can be a valuable part of your estate planning.
If you’re considering setting up a discretionary trust or would like to discuss your estate planning options, contact Blackstone Solicitors today for expert advice.
How we can help
We have a proven track-record of advising upon all aspects of private client work. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.to incorporate, what kind of ownership
How to Contact Our Private Client Solicitors
It is important for you to be well informed about the issues and possible implications of dealing with trusts. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Trust solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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