Our Will specialist's guide to Discretionary Trust Wills
Our Will specialist's guide to Discretionary trust Wills
These types of Wills are very popular with individuals who wish to leave their estate to particular beneficiaries but do not want them to receive the assets outright or absolutely.
These types of Wills can be very flexible whilst giving you peace of mind that your estate is ringfenced and under the control of your trustees.
See our Will writing process here.
What is a Discretionary Trust Will?
Your whole estate or a portion of your estate/specified asset would be transferred into the names of your trustees on your death.
Trustees are responsible for managing your estate and legally holding the funds in line with the terms of the Will. It is sensible to appoint independent trustees to manage the trust funds to avoid any conflict of interest and we would usually recommend that you appoint two. However, in many cases the trustees and beneficiaries are the same people.
The fund would be held by your trustees, and they would decide when, in what intervals, who received any funds from the estate and how much, using their absolute discretion.
The benefit of arranging your estate in this way is that the trustees could ensure certain individuals did not receive any funds from the trust depending on the individual’s circumstances (fiscal or otherwise) at the time and therefore the funds would be safeguarded. Alternatively, they could ensure that funds are provided if required. The division of the funds does not need to be equal between the potential beneficiaries.
Funds can be safeguarded because the potential beneficiaries are not entitled to the funds absolutely and it as the trustee’s discretion as to whether they receive any funds.
The only people who would be able to receive funds from the trust would be your selected beneficiaries which, would usually be your children and their children and so on. You could nominate individuals to receive the estate in the case that everyone mentioned in your Will had passed away already such as other family members, friends or charities.
When might a Discretionary Trust be worth considering?
A Discretionary Trust Will may be worth considering if you can relate to any of these circumstances: -
• You have a high value estate which you wish to preserve for future generations. This may include business interests or a property portfolio
• You have a ‘blended family’ i.e., second/third marriage with children and stepchildren and want to adequately provide for your new spouse but protect funds for your children from first relationship
• You do not like or trust your proposed beneficiary’s partner and worry they would be able to access the funds
• Your proposed beneficiaries are disabled, vulnerable or suffer from learning difficulties (whether from birth or otherwise) and unable to manage funds for themselves or are at risk of being exploited
• Your proposed beneficiaries are in care and you wish to preserve your funds/their inheritance from being used to pay ongoing care fees.
• Your proposed beneficiaries are in receipt of means-tested benefits
• Your proposed beneficiaries are suffering from mental health issues which means that they are unable to manage funds for themselves or are at risk of being exploited
• Your proposed beneficiaries are suffering from gambling, drug or alcohol addictions
• Your proposed beneficiaries are potentially going to divorce/dissolve their marriage/civil partnership and you wish to protect their inheritance from being used up in settlements
• Your proposed beneficiaries are having financial difficulties and you wish to protect their inheritance from being used up in bankruptcy/insolvency petitions.
How does it work?
On your death your assets subject to the discretionary trust would be transferred legally into the names of your chosen trustees.
This could involve a land registry transfer if a property is involved, stock transfer form if shares etc.
The trustees would then be responsible for managing and administering the trust funds.
If any funds were to be given to any potential beneficiaries, paperwork should be drawn up and retained to reflect this.
What is the significance of a Letter of Wishes?
It is advisable to prepare a Letter of Wishes for your trustees when setting up a Discretionary Trust Will.
This Letter of Wishes is not legally binding, and the trustees are not required to follow this. However, it provides some guidance and an explanation of your intentions for the use of the trust funds.
Letters of Wishes are usually private and confidential between you and your trustees but in some cases are disclosed to beneficiaries.
What are the tax implications?
These types of trusts are taxed under what is called the ‘relevant property regime’ which means that upon entry into the trust, assets will be taxed for inheritance tax purposes at 40% on the amount over and above the available inheritance tax exemptions to the estate.
There would also be anniversary charges on the value of assets held in the trust every 10 years at an approximate and maximum rate of 6% and charges when assets are distributed and therefore leave the trust at an approximate and maximum rate of 6%.
In additional to this, any income which is generated by the trust is taxed at the trustee rate (higher rate) and any gains are also taxed at the higher trustee rate.
Are there any downsides to doing this?
Trustees should meet at least annually to consider making distributions from the estate.
They should also do the following: -
• Prepare and keep accounts
• Annual tax returns
• Take financial and legal advice
• Ensuring the trust is registered with HMRC, if required.
Can the trust be brought to an end?
There are usually flexible powers contained in discretionary trusts to allow the trustees to bring the trust to an end by giving all the assets to the potential beneficiaries.
If the funds run out, then the trust would also come to an end.
There may also be powers within the trust to allow the trustees to transfer the funds into a different trust on different terms.
The maximum length of time that the trust can run is 125 years. At this point, any funds remaining would be distributed to default beneficiaries or in line with the rules of intestacy.
Will Writing Made Easy
At Avery Walters our team of specialists can provide pragmatic and cost-effective advice about Will writing.
Contact us on 0113 200 7480 or email us on info@averywalters.com to arrange your free initial, no obligation consultation with a specialist.
Laura Stafford
Solicitor & Head of Private Client
Phone: 0113 200 7480
Email: ls@averywalters.com
* Laura Stafford is the SFE accredited memberand a full member of STEP