A discretionary trust is a legal arrangement used within a will to protect your assets by effectively ring fencing them.
It can be used where a beneficiary is not capable or responsible enough to deal with money themselves, either by age or capacity, so can be an ideal way to plan for the future needs of a grandchild.
It may also help protect a child from losing their assets if they divorce their spouse.
How a discretionary trust works
Your assets are passed into a trust and you appoint a trustee to make decisions about how the trust income and capital is given to the potential beneficiaries. There are no defined shares as inheritance is solely at the discretion of the trustee.
The trustee will be guided by your wishes, and depending on the terms of the trust deed, can decide who gets what, how often and can also impose conditions on the beneficiaries if they see fit.
Choosing a trustee
The trustee will often be your executor. However, you may opt to choose someone entirely different, or appoint a professional, such as a solicitor. The most important factor is that they are neutral.
There can be some flexibility in the way the terms of the trust are carried out. For example, you may have requested funds be released to a grandchild when then reached 18. However, after your death circumstances may make it more sensible to defer payment until the age of 21.
If your child dies while there is still money in the trust, the money can pass directly to your grandchild without attracting inheritance tax.
If any of your beneficiaries are vulnerable you can ensure they receive maximum benefit from the money you have left them.
There are costs involved in running such a trust and the trustees can be put under a lot of pressure as they are legally responsible for managing the assets and ensuring all relevant taxes are paid.
Property sold under the trust may be subject to capital gains tax.
Income generated by the fund will be liable to income tax.
Additional Inheritance tax may be payable during the lifetime of the trust.
On a more personal level, your children may be upset that you have effectively tied up their inheritance and do not see them as responsible enough to manage the money themselves.
There are many more pros and cons to using a trust therefore, it is essential to speak to a qualified professional who will explain everything relevant to your particular circumstances.
How we can help
Katy Burgin is a qualified member of STEP – the Society of Trust and Estate Practitioners and can also offer specialised advice in respect of lasting powers of attorney, trusts and Court of Protection work.
Call 01302 320621 or email firstname.lastname@example.org and we will call you back