What is a Discretionary Trust in a Will and how does it work?

Discretionary Trusts are a flexible type of trust that enable trustees to manage and distribute assets to stated beneficiaries. Often this trust is incorporated into a Will to provide peace of mind for the individual – no matter what happens to their family’s circumstances after they die, the trust can be adapted to meet those changing needs.

Discretionary Trusts

Discretionary Trusts are often used by people to provide protection, control, and to reduce inheritance tax liabilities for chosen beneficiaries.

How do Discretionary Trusts work?

As a guide, discretionary trusts work in the following way:

• A trust is created by the individual in their Will
• Trustees are chosen by the individual (often these are the executors of the Will)
• Individual provides a list of potential beneficiaries for the assets in the Trust
• Potential beneficiaries can be alive, not yet born, or charities
• A trust can last up to 125 years
• Trustees are given total discretion as to how they distribute the Trust assets between those beneficiaries
• Trustees usually have to act together on decisions

Trustees can be given all or some of the following power:

• To add other beneficiaries to the trust later on
• To control the trust and the assets within it
• To decide which beneficiaries inherit what assets
• To decide when beneficiaries inherit

As trustees control the trust and don’t have to justify their decisions to the beneficiaries, it’s important to choose trustees extremely carefully.

Terms of the Trust

The person creating the trust will provide a side letter to the Trustees  stating how they wish the potential beneficiaries to benefit from the trust in the future.

There are different ways for beneficiaries to benefit, which include by the trust:

• Providing an income
• Providing maintenance money
• Lending money
• Making capital distributions
• Buying a property and letting the beneficiary live in it, paying some or no rent

How do Trustees know how to make decisions?

Trustees of a Discretionary Trust have the freedom to make decisions about who, from the list of potential beneficiaries benefits from the trust– and also can have the power to add extra beneficiaries after the individual’s death if circumstances suggest they should do so. These trusts are designed to provide flexibility for changing situations, which is why the trustees have a great deal of power.

It’s important that the individual who creates the Discretionary Trust in their Will includes a Letter of Wishes.

A Letter of Wishes ensures trustees know exactly what to do with the trust after the person dies. Although it’s not legally binding, the document is created separately to the Will and details reasons for the trust and what the person wants to happen with the assets going forward.

This document is private and can be updated during the person’s lifetime.

It’s vital that trustees are chosen carefully by the person, so that the Letter of Wishes is closely followed by the trustees after the person dies.

Why use a Discretionary Trust in a Will?

Discretionary Trusts in Wills provide flexibility and greater opportunities to manage wealth for families.

While every person creating a Discretionary Trust in their Will has unique reasons for doing so, as a guide there are usually two core reasons for these trusts:

• To protect and control family wealth
  This might be necessary for a number of reasons, including young or vulnerable or incapacitated beneficiaries unable to manage the money themselves; to protect a beneficiary’s entitlement to means-tested benefits; to offset concerns about a beneficiary’s relationship where a beneficiary might be facing Divorce; to ensure the money goes to the children in a blended family; or to allow for a change of beneficiaries and changes in their needs in the future.
• To reduce inheritance tax liabilities
  As part of estate planning, Discretionary Trusts can sometimes be useful for reducing inheritance tax liabilities.

Helping you with your Discretionary Trust

If you’d like to create a Discretionary Trust within your Will, our specialist team can help you with this. We have the knowledge and experience of creating Discretionary Trusts in our clients’ Wills for various reasons – and of ensuring that each one matches the individual’s needs and goals.

Your solicitor will work with you on the creation of the trust as well as your Letter of Wishes and Will. As part of the process, we will make sure that you’ve carefully considered the trustees you choose – and that you’re able to both protect and provide for loved ones long after you die.

To speak to us about Discretionary Trusts or to discuss making a Will that incorporates a trust, you can contact us at our Chorlton office on 0161 860 7123 or email chorlton@hlfberry.com or at our Failsworth office on 0161 681 4005 or email failsworth@hlfberry.com and we will be happy to help.