Discretionary Trusts Vs Bare Trusts: Understanding The Differences

When it comes to estate planning, trusts are a highly effective way to manage and protect assets. Two common types of trusts are discretionary trusts and bare trusts, each serving distinct purposes and offering unique benefits. At Blackstone Solicitors, we specialise in helping clients across England and Wales navigate the complexities of trust law. This article explores the key differences between discretionary trusts and bare trusts, helping you determine which option may be best suited to your needs.

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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 Trust?

Before diving into the specifics, it’s important to understand the basic concept of a trust. A trust is a legal arrangement where one party (the settlor) transfers assets to another party (the trustee) to be held and managed for the benefit of a third party (the beneficiary). The terms of the trust dictate how the assets are managed and distributed.

Both discretionary trusts and bare trusts share this basic structure, but they differ significantly in terms of flexibility, control, and taxation.

What is a Bare Trust?

A bare trust, also known as a simple trust, is the most straightforward type of trust. In a bare trust:

• Beneficiaries have an immediate and absolute right to both the income and capital of the trust.
• The trustee holds the assets on behalf of the beneficiaries but does not have discretion over how or when they are distributed.
• The beneficiaries are fixed and cannot be changed once the trust is established.

Bare trusts are often used when assets are being held for minors until they reach the age of 18 (or 16 in Scotland), at which point the beneficiaries gain full control of the trust’s assets.

Advantages of Bare Trusts

1. Simplicity: Bare trusts are straightforward to establish and administer.
2. Transparency: Beneficiaries have full visibility and control over the trust’s assets upon reaching the age of majority.
3. Tax Treatment: For tax purposes, the assets in a bare trust are treated as belonging to the beneficiary, potentially allowing for lower tax rates if the beneficiary’s income is below certain thresholds.

Disadvantages of Bare Trusts

1. Lack of Flexibility: Once established, the terms of a bare trust cannot be altered, and the beneficiaries are fixed.
2. No Asset Protection: Because beneficiaries have an absolute right to the assets, the trust does not provide protection from creditors, divorce settlements, or poor financial decisions.
3. Limited Control: The settlor and trustee have no discretion over how the assets are distributed.

What is a Discretionary Trust?

A discretionary trust offers far greater flexibility and control. In a discretionary trust:

• The trustees have full discretion over how and when to distribute the trust’s income and capital among the beneficiaries.
• Beneficiaries do not have an automatic right to the trust’s assets.
• The class of beneficiaries can often be broad, and the settlor can specify guidelines for trustees to follow in a non-binding letter of wishes.

Discretionary trusts are commonly used for more complex estate planning needs, such as protecting family wealth, providing for vulnerable beneficiaries, or reducing inheritance tax (IHT) liabilities.

Advantages of Discretionary Trusts

1. Flexibility: Trustees can make distribution decisions based on the changing needs and circumstances of the beneficiaries.
2. Asset Protection: The trust’s assets are protected from creditors, divorce settlements, and beneficiaries’ financial mismanagement.
3. Tax Planning: Discretionary trusts can be used as part of an inheritance tax mitigation strategy.
4. Preservation of Wealth: Assets can be preserved for future generations, ensuring long-term family wealth.

Disadvantages of Discretionary Trusts

1. Complexity: Discretionary trusts are more complex to set up and administer than bare trusts.
2. Tax Implications: Discretionary trusts are subject to specific tax rules, including periodic charges and exit charges.
3. Cost: The initial setup and ongoing management of a discretionary trust can be more expensive due to its complexity.

Key Differences Between Discretionary Trusts and Bare Trusts

The table below summarises the key differences between the two types of trusts:

Feature	Bare Trust	Discretionary Trust
Beneficiary Rights	Absolute and immediate	No automatic right; at trustees’ discretion
Flexibility	Fixed terms and beneficiaries	Highly flexible
Control	Limited to holding assets	Trustees have significant control
Tax Treatment	Assets treated as belonging to beneficiaries	Trust subject to specific tax rules
Asset Protection	Limited protection	Strong protection from creditors, divorce, etc.
Complexity	Simple	Complex

Choosing the Right Trust for Your Needs

The choice between a bare trust and a discretionary trust will depend on your specific circumstances and objectives. Below are some considerations:

• Simplicity vs Flexibility: If your primary goal is simplicity and you are comfortable with beneficiaries having full control over the assets, a bare trust may be appropriate. If flexibility and control are more important, a discretionary trust is likely the better option.
• Asset Protection: If you are concerned about protecting assets from external risks, such as divorce settlements or financial mismanagement, a discretionary trust offers superior protection.
• Tax Planning: For beneficiaries with low incomes, a bare trust might provide tax advantages. However, for larger estates or complex tax planning, discretionary trusts can be more effective.
• Future Uncertainty: If you anticipate changes in family dynamics or beneficiaries’ circumstances, the flexibility of a discretionary trust can be invaluable.

Why Choose Blackstone Solicitors?

At Blackstone Solicitors, we understand that every client’s needs are unique. Our experienced team can provide clear, tailored advice to help you determine whether a bare trust or a discretionary trust is the right solution for you. We offer comprehensive services, including:

• Advising on the suitability of different types of trusts.
• Drafting trust deeds and other legal documents.
• Assisting with the transfer of assets into the trust.
• Providing ongoing support to trustees to ensure compliance and effective management.

We pride ourselves on delivering professional and personalised service to clients across England and Wales.

Conclusion

Trusts are an essential tool in estate planning, offering the ability to manage, protect, and distribute assets effectively. While bare trusts and discretionary trusts serve different purposes, understanding their key differences will help you make an informed decision. Whether you seek simplicity or flexibility, our team at Blackstone Solicitors is here to guide you through the process and ensure your assets are safeguarded for future generations.

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.

Authored by Ben Posted in Blog, News Tagged as

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