In the process of estate planning, one of the biggest concerns for many individuals is ensuring that their assets are distributed according to their wishes after their death. However, even with the most careful planning, disputes can arise between family members over inheritance, especially in complex family situations. In such cases, a Discretionary Trust can serve as an effective safeguard, offering flexibility, control, and protection for your estate, while reducing the likelihood of disputes.
At Blackstone Solicitors, we assist clients across England and Wales in creating bespoke discretionary trusts that align with their specific circumstances. In this article, we’ll explore how discretionary trusts work, their benefits, and how they can help minimise the risk of inheritance disputes.
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What is a Discretionary Trust?
A Discretionary Trust is a legal structure where trustees hold and manage assets for the benefit of one or more beneficiaries. The trustees are given discretion over how and when the trust’s assets or income are distributed to beneficiaries, meaning that the beneficiaries do not have an automatic right to the assets.
This type of trust provides the settlor (the person who creates the trust) with significant flexibility in controlling how their estate is managed after their death. While the trust’s terms will outline who the potential beneficiaries are, the trustees decide which beneficiaries should receive distributions, how much they should receive, and when.
Why Do Inheritance Disputes Arise?
Inheritance disputes can be emotionally charged and financially draining. They often arise for various reasons, including:
- Family Dynamics
In complex family situations, such as blended families, disputes can occur if beneficiaries feel they have not been treated fairly. For example, children from previous relationships may worry that their inheritance is being overlooked in favour of a new spouse or partner. - Lack of Clear Instructions
Wills can sometimes be vague or fail to account for specific assets or family members, leading to uncertainty. If beneficiaries are unclear about the deceased’s wishes, this can create tension and disputes over what was intended. - Challenging the Will
In some cases, beneficiaries may attempt to challenge the validity of a will. Common reasons for this include claims that the deceased lacked the mental capacity to make a valid will, that the will was made under duress, or that a dependent was not adequately provided for. - Financial Needs of Beneficiaries
Family members may experience financial pressures that influence their expectations about what they should inherit. If one beneficiary feels financially disadvantaged compared to others, they may challenge the estate’s distribution.
By establishing a discretionary trust, you can help mitigate these risks, ensuring that your estate is managed in a way that reflects your intentions and reduces the potential for disputes among beneficiaries.
How Discretionary Trusts Can Prevent Inheritance Disputes
Discretionary trusts offer a number of advantages that can help prevent or minimise inheritance disputes. Below are some key ways in which these trusts provide protection:
- Flexibility in Distribution
One of the main benefits of a discretionary trust is its flexibility. The trustees have discretion over how the trust’s assets are distributed to beneficiaries. This allows trustees to take into account the personal circumstances of each beneficiary at the time of distribution. For example, if one beneficiary is financially stable while another is in need of greater support, the trustees can choose to provide more support to the latter.
This flexibility can help prevent disputes over “fairness” by ensuring that distributions are made based on individual needs rather than a fixed entitlement. It also reduces the likelihood of beneficiaries feeling left out or unfairly treated, as the trustees are responsible for making impartial decisions based on the trust’s objectives.
- Safeguarding Against Challenges
By placing assets into a discretionary trust, you can reduce the risk of your estate being challenged. In some cases, wills can be contested on the grounds that they do not provide adequately for a family member or dependent. However, discretionary trusts give trustees the power to make decisions in the best interests of all beneficiaries. Since no one has a fixed entitlement, the potential for an individual to challenge their portion of the inheritance is reduced.
Moreover, if someone attempts to challenge the will, the assets held in the trust are not subject to the same level of scrutiny, as they are no longer part of the settlor’s personal estate. This provides an extra layer of protection for your assets and can deter potential disputes.
- Providing for Vulnerable or Young Beneficiaries
Discretionary trusts are often used to provide for vulnerable beneficiaries, such as minors, individuals with disabilities, or those who may struggle to manage a large inheritance responsibly. In such cases, a discretionary trust allows trustees to provide for the beneficiary’s needs without giving them direct control over the assets.
For example, if a child is too young to manage their inheritance, the trustees can make decisions about when and how the funds are used for their benefit. Similarly, if a beneficiary has issues with debt or addiction, the trustees can manage the assets to ensure they are not squandered. This approach protects the beneficiary from themselves and reduces the potential for disputes among other family members who may be concerned about how the inheritance will be used.
- Managing Family Dynamics
Family dynamics can be complicated, particularly in situations involving second marriages, stepchildren, or estranged family members. Discretionary trusts allow you to provide for all of your beneficiaries without giving any one individual a guaranteed share of the assets.
For example, you may want to ensure that your spouse is supported after your death, while also ensuring that your children from a previous relationship receive their share of the estate in the future. A discretionary trust can achieve this by giving your trustees the ability to provide income or capital to your spouse during their lifetime, with the remaining assets going to your children upon the spouse’s death.
This arrangement can help to prevent disputes between family members, as the trust can be structured to accommodate the needs of both your spouse and your children.
- Protecting Assets from Creditors
If a beneficiary is facing financial difficulties, such as bankruptcy or creditor claims, assets held within a discretionary trust are typically protected from being seized. Since the beneficiary does not have a direct entitlement to the assets, creditors cannot make claims against the trust. This can help prevent disputes that may arise if a beneficiary’s inheritance is at risk due to their financial situation.
The Role of Trustees
The success of a discretionary trust in preventing inheritance disputes often depends on the trustees. Trustees are responsible for managing the trust’s assets and making decisions about distributions in accordance with the trust deed. As such, it is crucial to choose trustees who are trustworthy, impartial, and capable of carrying out their duties effectively.
You can appoint family members, friends, or professional trustees such as solicitors or accountants. In many cases, a combination of family members and professionals is a good approach, as it allows for both a personal understanding of family dynamics and professional expertise.
At Blackstone Solicitors, we often act as professional trustees for our clients, ensuring that the trust is managed efficiently and in line with the settlor’s wishes. We understand the importance of maintaining neutrality and managing assets in the best interests of all beneficiaries, which is key to preventing potential disputes.
How to Set Up a Discretionary Trust
Setting up a discretionary trust involves several steps, and it’s important to work with an experienced solicitor to ensure everything is done correctly. Here’s an overview of the process:
- Identify Your Assets
Decide which assets you want to place into the trust. These could include property, savings, investments, or other valuable assets. - Appoint Trustees
Choose individuals or professionals to act as your trustees. These individuals will be responsible for managing the trust and making distribution decisions. - Draft a Trust Deed
The trust deed is the legal document that outlines the terms of the trust, including the beneficiaries, trustees’ powers, and the purpose of the trust. You may also include a Letter of Wishes to provide guidance to your trustees on how you want the trust to be managed. - Transfer Assets to the Trust
Once the trust deed is in place, you must legally transfer the assets into the trust, making them the property of the trust rather than your personal estate. - Register the Trust
Most trusts in the UK must be registered with HMRC’s Trust Registration Service (TRS) to comply with tax obligations.
Conclusion
A discretionary trust can be an invaluable tool for protecting your estate and ensuring that your assets are distributed according to your wishes. By providing flexibility in distribution, safeguarding against challenges, and managing family dynamics, discretionary trusts can help prevent inheritance disputes and protect vulnerable beneficiaries.
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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