When it comes to estate planning, many people across England and Wales look for ways to protect their wealth and ensure a smooth transfer of assets to their beneficiaries. One highly effective tool for achieving this is a discretionary trust. As a law firm experienced in guiding individuals through the intricacies of estate planning, Blackstone Solicitors is here to explain the benefits and nuances of discretionary trusts to help you make informed decisions for your future.
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For a free initial discussion on how we can help you deal with the legal implications of creating a Trust, get in touch with us today. We are also experienced in dealing with all aspects of Wills and Probate and we will review your situation and discuss the options open to you in a clear and approachable manner. Early expert legal assistance can help ensure you avoid the stress of dealing with these issues on your own. Simply call us on 0345 901 0445 or click here to make a free enquiry and a member of the team will get back to you.
What Is a Discretionary Trust?
A discretionary trust is a type of trust where the trustees are given the power to decide how to distribute the trust’s income or assets among the beneficiaries. Unlike fixed-interest trusts, where each beneficiary’s share is predetermined, a discretionary trust offers flexibility by allowing the trustees to make decisions on distributions based on the circumstances of the beneficiaries at the time.
The key elements of a discretionary trust include:
- The Settlor: This is the person who creates the trust and transfers assets into it.
- The Trustees: These are the individuals or companies appointed to manage the trust’s assets. Trustees have a fiduciary duty to act in the best interests of the beneficiaries and in accordance with the terms of the trust deed.
- The Beneficiaries: The people or entities who may benefit from the trust. In a discretionary trust, the beneficiaries do not have an automatic right to the assets; instead, distributions are made at the discretion of the trustees.
- The Trust Deed: This is the legal document that establishes the trust and sets out its terms, including the powers of the trustees and the rules governing the distribution of assets.
Discretionary trusts are a valuable tool in estate planning due to their flexibility and the control they provide over how assets are managed and distributed.
The Benefits of a Discretionary Trust
Discretionary trusts offer several advantages for those looking to protect their wealth and maximise the value of their estate:
- Flexibility in Distribution
One of the main benefits of a discretionary trust is the flexibility it provides. Because the trustees decide how much each beneficiary receives and when, they can adapt the distribution of assets to suit changing circumstances. For example, if one beneficiary encounters financial hardship or requires funds for a specific purpose, the trustees can allocate more resources to that individual while withholding distributions from others who may not currently need them.
- Asset Protection
Assets held in a discretionary trust can be protected from various risks. Since the beneficiaries do not own the assets directly, the assets are generally safeguarded from creditors, divorce settlements, or bankruptcy proceedings involving the beneficiaries. This feature makes discretionary trusts an excellent option for protecting family wealth across generations.
Discretionary trusts can be an effective tool for inheritance tax (IHT) planning. When assets are placed into a discretionary trust, they are usually considered outside of the settlor’s estate for IHT purposes, provided the settlor survives for seven years after making the transfer. This can help to reduce the overall value of the estate and therefore minimise the amount of IHT due upon the settlor’s death.
Additionally, discretionary trusts can be used to manage the timing of distributions to beneficiaries, potentially allowing them to avoid higher rates of tax that could apply if they received a large inheritance outright.
- Maintaining Control Over the Use of Assets
Discretionary trusts allow the settlor to specify how the assets should be managed and distributed, providing peace of mind that their wishes will be followed. This level of control can be especially useful if the beneficiaries are young, vulnerable, or have special needs. The trustees can make decisions that align with the settlor’s intentions, providing financial support in a manner that is appropriate for the beneficiaries’ circumstances.
- Preserving Family Wealth
By using a discretionary trust, it is possible to keep family wealth intact and ensure it is passed down to future generations. The trustees can manage the assets prudently, taking into account investment decisions, distribution needs, and other factors that could affect the long-term value of the trust.
How to Set Up a Discretionary Trust
Establishing a discretionary trust involves a few important steps, and it’s advisable to seek professional legal advice to ensure the process is handled correctly. Here’s an overview of the process:
Step 1: Decide on the Purpose of the Trust
The first step in setting up a discretionary trust is to clearly define its purpose. Consider why you want to create the trust and what you hope to achieve, whether it’s protecting family assets, providing for future generations, or reducing inheritance tax liability. This will help shape the terms of the trust and the selection of beneficiaries.
Step 2: Choose the Trustees
Carefully selecting trustees is crucial, as they will be responsible for managing the trust’s assets and making decisions about distributions. Trustees can be family members, friends, professionals, or a combination of these. It’s essential to choose individuals who are reliable, trustworthy, and capable of making sound financial decisions. Alternatively, you could appoint a professional trustee company, which would bring expertise and impartiality to the role.
Step 3: Draft the Trust Deed
The trust deed is the legal document that outlines the terms and conditions of the trust, including the powers of the trustees and the rules governing how and when assets should be distributed. It’s important to work with a solicitor to ensure that the trust deed is comprehensive and tailored to your specific needs.
Step 4: Transfer Assets into the Trust
Once the trust deed is drafted, you will need to transfer assets into the trust. These assets could include cash, property, shares, or other investments. Bear in mind that there may be tax implications when transferring certain assets, so it’s advisable to discuss this with your solicitor beforehand.
Step 5: Register the Trust
Since 2017, most trusts in the UK must be registered with HMRC under the Trust Registration Service (TRS). This is an important compliance step that must be completed, as failure to register can result in penalties.
Tax Implications to Consider
While discretionary trusts offer significant benefits, it’s important to be aware of the tax implications associated with them. Here are some key considerations:
- Inheritance Tax: When assets are placed into a discretionary trust, they may be subject to an immediate charge to inheritance tax at a rate of 20% if the value of the transfer exceeds the available nil-rate band. There can also be ongoing charges, such as the ten-yearly charge (currently up to 6% of the trust’s value).
- Income Tax: Income generated by assets within the trust is subject to income tax, with higher rates applying than for individuals. However, trustees can distribute income to beneficiaries who may pay tax at a lower rate, potentially resulting in a more favourable outcome.
- Capital Gains Tax: If the trust sells or disposes of assets, capital gains tax may apply. Trustees benefit from a lower annual exemption compared to individuals, so it’s important to manage any disposals carefully.
Is a Discretionary Trust Right for You?
Discretionary trusts can be a powerful tool for estate planning, but they may not be suitable for everyone. It’s essential to consider your specific circumstances, including your financial goals, the needs of your beneficiaries, and the potential tax implications. Consulting with an experienced solicitor can help you weigh the benefits and drawbacks, ensuring that you choose the most appropriate approach for your situation.
How Blackstone Solicitors Can Help
At Blackstone Solicitors, we understand that navigating the world of estate planning can be complex and daunting. Our expert team can guide you through the process of setting up a discretionary trust, advising you on the most effective strategies to maximise your estate’s value while safeguarding your family’s future.
We offer personalised advice across England and Wales, ensuring that all legal considerations are addressed, and your wishes are clearly reflected in the trust deed. Whether you are looking to protect assets, reduce inheritance tax liability, or provide for loved ones, our solicitors are here to help you achieve your estate planning goals.
Conclusion
Discretionary trusts are a versatile and effective solution for those looking to maximise the value of their estate while retaining control over the distribution of assets. They offer flexibility, protection, and potential tax benefits, making them an attractive option for many families. However, the rules governing trusts can be complex, so seeking professional advice is essential.
Contact Blackstone Solicitors today to discuss how we can help you with your estate planning needs, and ensure your wealth is safeguarded for generations to come.
How we can help
We have a proven track-record of helping clients create Trusts. We are a multidisciplinary firm and have all the expertise inhouse to satisfy the most exacting requirements of our clients. We will guide you through all the necessary legal due diligence in a comprehensive and timely manner. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact Our Wills and Probate Solicitors
It is important for you to be well informed about the issues and possible implications of creating a Trust. However, expert legal support is crucial in terms of ensuring your wishes are met as you would want them to be.
To speak to our Wills and Probate 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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