Planning for the future can be a bit overwhelming, especially when it comes to making a will. Most people want to make sure their loved ones are taken care of when they’re no longer around, but the way that looks can vary due to different circumstances.
In this article, we’ll explore how discretionary trusts in wills can be used to add flexibility to your estate planning.
What is a discretionary trust?
A discretionary trust is a flexible way to leave behind money and assets for your loved ones. Instead of deciding exactly who gets what, you pass that responsibility on to appointed trustees.
The trustees can then choose what to pay out, who to pay it to (known as the beneficiaries), how often payments happen, and any other special conditions.
How do discretionary trusts work?
In a discretionary trust, you leave some or all of your estate to the trust and pick who might benefit from it. This could even include people who haven’t been born yet.
The trustees you appoint then have the power to pick and choose who, from your chosen potential beneficiaries, gets what - which is why it’s called a discretionary trust, as it’s at the discretion of the trustees.
Why set up a discretionary trust?
A discretionary trust can be useful if you’re not sure how you want to divide your estate when you pass away, or if things might change. For example, if you already have grandchildren but anticipate more may come along in the future and you want to make sure they benefit from your estate, too.
There are other reasons why someone might choose to use a discretionary trust in their will, also. For example, imagine one of your children isn’t great with money. During your estate planning, you might be hesitant to give them a big chunk of change if you’re not confident they’ll be able to make the best use of it. A discretionary trust can be a good alternative where the trustees decide when the best time is for them to give them their share of the estate.
Who can benefit from a discretionary trust?
When it comes to picking beneficiaries for your discretionary trust, they can be:
Specific people;
A group (i.e. your grandchildren and their kids);
Charities or other groups, like companies or sports clubs.
The main goal of a discretionary trust is to provide flexibility in deciding who benefits from your trust. Therefore, you can be as specific or general as you wish, even accounting for people who haven’t been born yet.
Can a trustee of a discretionary trust also be a beneficiary?
Technically, yes, a trustee of a discretionary trust can also be a beneficiary.
However, it’s important to understand that trustees have a lot of power, therefore having individuals in charge who also have a financial interest in the trust can be problematic, although not always.
If you’re considering a discretionary trust in your will, it’s a good idea to make sure at least one trustee is someone who won’t benefit from the trust to keep things fair and balanced.
How do you make your wishes for a discretionary trust known?
Alongside your discretionary trust, it’s a good idea to leave a letter of wishes for your trustees. This letter should tell them when and under what circumstances you’d like your beneficiaries to get what you’ve left for them.
It’s important to note, however, that while the trustees of a discretionary trust will consider your wishes, they aren't tied to them. For example, if you want your grandchildren to receive their share when they turn 21, providing they’re responsible enough, you can put this in your letter of wishes. However if, when the time comes, the trustees don’t think your grandchildren are ready to handle such a big sum of money, they can decide to hold off until they think the time is right.
In a nutshell, you can give your trustees a heads-up on what you want to happen, but they have the final say based on what they think is best for everyone involved.
How can a discretionary trust be used to protect your assets?
Putting trustees in charge of when beneficiaries get their inheritance can be useful if potential beneficiaries:
Can’t handle their affairs or finances due to age or mental capacity;
Might lose their benefits if they receive their inheritance as a lump sum;
Might misuse their inheritance because of addiction or mental health issues;
Are vulnerable to financial abuse;
Aren’t very good at managing money responsibly.
This is where a discretionary trust shines as the trustees make sure beneficiaries are taken care of while making sure your assets aren’t misused or wasted.
Benefits of a discretionary trust
One of the main benefits of a discretionary trust is that they are flexible. Instead of setting the distribution of your assets in stone, you give the trustees the power to change who gets what, and when, depending on the circumstances.
They can also be used to protect certain individuals, especially beneficiaries like children, those with health issues that might affect their capacity or individuals who struggle to manage their money effectively.
Finally, discretionary trusts can also work as a shield against business creditors or a spouse in a divorce, keeping your assets safer.
Can a discretionary trust reduce your inheritance tax liability?
For some, when it comes to estate planning, inheritance tax liability is a concern. A discretionary trust can sometimes be used in such a way as to make sure beneficiaries get the most out of it without being hit with a hefty inheritance tax bill.
For example, sometimes a significant inheritance can affect a beneficiary's eligibility for means-tested benefits if it exceeds a certain amount. However, a discretionary trust can be used to prevent this, ensuring beneficiaries can still receive certain state support or benefits.
When it comes to property, discretionary trusts can also be used to take advantage of certain tax reliefs that might not be available later on. And, if you have assets like land that will increase in value, it can help manage taxes relating to that land effectively.
How to create a discretionary trust
A common way to set up a discretionary trust is by including it in your will. Alternatively, you can be proactive and set up the trust while you’re still enjoying life.
If you do decide to set up a discretionary trust while you’re still alive, it’s important to know that if you pass away within 7 years, the trust might be subject to inheritance tax.
At Lawhive, our wills, trust, and probate solicitors can help you set up a trust, make a will, or provide further advice about estate planning.
To get started, get a free case assessment and fixed-fee quote from our legal assessment team today.