As a high net worth individual, effective estate planning is crucial to ensure your wealth is protected, tax liabilities are minimised, and your assets are distributed according to your wishes. One of the most versatile tools available for managing and safeguarding your wealth is the discretionary trust. These trusts provide flexibility, control, and protection for your estate, making them an excellent choice for individuals with significant assets.
At Blackstone Solicitors, we offer expert legal advice to high net worth individuals across England and Wales. In this guide, we’ll explain how discretionary trusts work, their key benefits, and why they are particularly useful for those with substantial wealth.
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What is a Discretionary Trust?
A discretionary trust is a legal arrangement in which a settlor (the person establishing the trust) transfers assets into a trust to be managed by trustees. The trustees are responsible for managing the assets for the benefit of one or more beneficiaries, but the beneficiaries do not have a fixed right to the income or capital from the trust. Instead, the trustees have the discretion to decide which beneficiaries receive payments from the trust, how much they receive, and when they receive it.
This flexibility is one of the main reasons why discretionary trusts are favoured by high net worth individuals. The trustees’ discretion means that the trust can adapt to changing circumstances, allowing for tailored distributions based on the beneficiaries’ needs at any given time.
Why are Discretionary Trusts Particularly Useful for High Net Worth Individuals?
For individuals with substantial assets, discretionary trusts offer a number of important advantages, particularly in the areas of tax planning, asset protection, and family wealth management. Below, we discuss some of the key reasons why a discretionary trust may be a valuable part of your estate planning strategy.
- Inheritance Tax (IHT) Mitigation
Inheritance tax can have a significant impact on the value of your estate when it passes to your beneficiaries. In the UK, IHT is charged at 40% on estates above the tax-free threshold (currently £325,000), and for high net worth individuals, this can result in a large tax bill. A discretionary trust can help mitigate inheritance tax by removing assets from your estate.
When you transfer assets into a discretionary trust, they are no longer considered part of your estate for IHT purposes (subject to the 7-year rule). This can significantly reduce the taxable value of your estate, potentially saving your beneficiaries from paying substantial amounts in IHT.
Additionally, a discretionary trust can be structured to take advantage of the available nil-rate bands and other IHT reliefs. While there are periodic tax charges associated with trusts, careful planning can help minimise these charges, making discretionary trusts an effective tool for long-term IHT planning.
- Asset Protection
High net worth individuals are often concerned about protecting their wealth from potential risks, such as creditor claims, divorce settlements, or beneficiaries mismanaging their inheritance. A discretionary trust provides a robust layer of protection for your assets, as the beneficiaries do not have direct control or ownership over the trust’s assets.
For example, if one of your beneficiaries experiences financial difficulties, the assets held in the trust are typically safeguarded from creditors. Similarly, if a beneficiary goes through a divorce, the assets in the discretionary trust are less likely to be included in divorce proceedings, as they are not considered part of the beneficiary’s personal estate.
This makes discretionary trusts a particularly attractive option for high net worth individuals looking to protect their wealth from external threats and ensure that their assets are preserved for future generations.
- Flexibility in Distribution
One of the most significant benefits of a discretionary trust is the flexibility it offers in how and when assets are distributed to beneficiaries. High net worth individuals often have complex family structures, and the financial needs of beneficiaries can change over time. A discretionary trust allows trustees to make decisions based on the circumstances at the time, rather than locking in a fixed entitlement for each beneficiary.
For example, if one beneficiary is pursuing higher education and requires financial support, the trustees can make distributions to cover educational expenses. Alternatively, if another beneficiary is financially stable and does not need immediate support, the trustees can withhold distributions until they are necessary.
This flexibility is particularly valuable for high net worth families, where the needs of beneficiaries may vary significantly. It also allows you to protect vulnerable beneficiaries, such as those with disabilities or those who may not be able to manage a large inheritance responsibly.
- Maintaining Control Over Your Wealth
Discretionary trusts allow you to maintain a level of control over how your wealth is managed and distributed, even after your death. While the trustees have discretion over distributions, you can provide guidance on how you want the trust to be managed through a “Letter of Wishes.” This document, while not legally binding, gives the trustees insight into your intentions and helps ensure that your wishes are respected.
For high net worth individuals, maintaining control over how your assets are used can be a key concern, particularly if you want to ensure that your wealth is passed down through generations in a way that aligns with your values. A discretionary trust allows you to set conditions for how your wealth is used, providing peace of mind that your assets will be managed in accordance with your long-term goals.
- Confidentiality and Privacy
High net worth individuals often prefer to keep their financial affairs private. When assets are distributed through a will, the details of your estate can become public record during probate. However, assets held in a discretionary trust are managed privately by the trustees, and distributions do not need to go through probate.
This privacy is particularly important if you want to keep the details of your estate confidential, or if you have complex family arrangements that you would prefer to handle discreetly.
How to Set Up a Discretionary Trust
Setting up a discretionary trust involves several key steps, and it’s important to seek professional legal advice to ensure that the trust is structured correctly. Below is a guide to the process:
- Identify the Assets to Place in the Trust
The first step in setting up a discretionary trust is to decide which assets you want to transfer into the trust. These can include property, investments, cash, or other valuable assets. It’s important to consider the long-term goals of the trust and how the assets you place into it will help achieve those goals.
- Choose Your Trustees
The trustees are responsible for managing the trust’s assets and making decisions about distributions. You can appoint family members, trusted friends, or professional trustees, such as solicitors or accountants. It’s essential to choose trustees who are trustworthy, financially responsible, and capable of fulfilling their duties.
Many high net worth individuals choose to appoint a mix of family members and professionals to ensure that the trust is managed both impartially and with an understanding of family dynamics. At Blackstone Solicitors, we frequently act as professional trustees, ensuring that the trust is managed efficiently and in line with the settlor’s wishes.
- Draft the Trust Deed
The trust deed is the legal document that outlines the terms of the discretionary trust. It will specify the trustees, the beneficiaries, and the powers and duties of the trustees. The trust deed also provides the framework for how the trust will be managed and how distributions will be made. Additionally, you may want to include a Letter of Wishes to provide more detailed guidance for the trustees.
- Transfer the Assets into the Trust
Once the trust deed is drafted, the assets must be transferred into the trust. This may involve transferring property ownership, moving funds into designated trust accounts, or reassigning investments. Once the assets are in the trust, they are no longer considered part of your personal estate.
- Register the Trust with HMRC
Most trusts in the UK, including discretionary trusts, need to be registered with HMRC’s Trust Registration Service (TRS). This ensures that the trust complies with tax regulations and can help avoid potential penalties.
Tax Considerations for Discretionary Trusts
While discretionary trusts offer significant benefits for high net worth individuals, it’s important to be aware of the tax implications. Trusts are subject to their own tax regime, which includes:
- Inheritance Tax: Trusts are subject to periodic inheritance tax charges, including a 10-year anniversary charge of up to 6% on the value of the trust’s assets.
- Income Tax: Income generated by the trust may be taxed at higher rates than personal income tax.
- Capital Gains Tax: Trusts may also be liable for capital gains tax when assets are sold or transferred.
However, with careful planning, these tax charges can be managed effectively. At Blackstone Solicitors, we work with our clients to develop trust structures that minimise tax liabilities while achieving their estate planning goals.
Is a Discretionary Trust Right for You?
For high net worth individuals, discretionary trusts offer a powerful and flexible tool for managing wealth, protecting assets, and minimising tax liabilities. Whether you’re looking to safeguard your estate for future generations, protect vulnerable beneficiaries, or ensure that your wealth is distributed according to your wishes, a discretionary trust can provide the solution.
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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