Discretionary Trusts – The What, The Why and the How

You may be familiar with Trusts and their basic principles but there are different kinds, this blog explains Discretionary Trusts and why you might need one. 

What is a Discretionary Trust? 

First let us look at the definition of a Discretionary Trust. This is a type of Trust where the trustees have complete control of how and why the Trust income or capital is distributed to the beneficiaries. No single beneficiary has any entitlement to the Trust but they all have an interest and the Trustees decide how the  funds are distributed dependent on need. 

Who might need a Discretionary Trust? 

  • A discretionary trust can also be used to preserve funds for a minor until they attain an age where they can manage the money for themselves, or to protect funds for beneficiaries beyond their age of majority 
  • It can be used to safeguard money from a beneficiary that is going through a divorce. The benefit of entering their share of the estate in this trust is that the trust funds will not be treated as belonging to the beneficiary as the trust owns the assets and will therefore fall outside of the beneficiary’s estate 
  • Holding funds in the trust will also protect the money from the beneficiary’s creditors or potential bankruptcy. It is also useful where the beneficiary has a drink, drug or gambling problem and the testator does not want to gift the monies to them directly for fear it could exacerbate their addiction. 

What are the benefits of a Discretionary Trust? 

The aim of this type of trust is to provide flexibility. This could mean that trustees have the flexibility to manage the money paid to beneficiaries in accordance with their changing needs etc. 

The Trust can protect a beneficiary’s share where they are financially unstable, be used for tax saving reasons, protect the benefits of a vulnerable beneficiary or safeguard money for a beneficiary who is currently going through or likely to go through a divorce. 

What else do I need to know? 

As the trustees have complete discretion over the trust funds, it is advisable for the testator to write a letter of wishes accompanying the Will which provides some guidance to the trustees in how they would like the assets to be distributed. It is important to note that letters of wishes are not a legally binding document and therefore there is no obligation placed on the trustees to follow them. 

It is important to remember that a discretionary trust requires a minimum of two beneficiaries due to the discretionary factor the trustees have. Beneficiaries can either be individuals or classes  – for example “my children.” 

A discretionary trust can last for a maximum of 125 years; therefore, it is important to consider who the default beneficiaries will be i.e. those who will inherit the trust fund when the trust ends. 

If you’d like to discuss the possibility of including a Trust in your Will please contact me for a free, no obligation chat on amanda@alhlegal-willwriters.co.uk or on 0115 878 0417