Discretionary Trusts in Wills Explained

A Discretionary Trust is when money or other assets from your Estate are left in Trust. The Trust is managed by appointed Trustees who decide which people become Beneficiaries and when and how they should receive any inheritance.

For initial advice and guidance call Co-op Legal Services on 03306069591 or contact us online and we will help you.

How Do Discretionary Trusts work?

There are lots of different types of Trusts that you can create when making a Will, and a Discretionary Trust is just one example.

What happens with a Discretionary Trust in your Will is that you leave your Estate, or part of it, to a Trust. You decide who the potential Beneficiaries of this Trust will be, which can include people who are not born yet.

This might arise if you want to leave assets to your grandchildren, but there is a possibility that further grandchildren will be born before you pass away. The terms of the Trust empower the people you have appointed to manage the Trust (known as the Trustees) to use their discretion to decide which, of the potential Beneficiaries you’ve named, become Beneficiaries. The Trustees have complete discretion on the matter, which is why they are called ‘Discretionary’ Trusts.

A Discretionary Trust is extremely useful if you are not sure how you want to ultimately distribute your Estate or if that decision will be directly influenced by other circumstances that you cannot be sure of at the time of making your Will. By making a Discretionary Trust, you pass the decision of how and when the Trust will be distributed over to the Trustees, who make the decision for you. When setting up the Trust in your Will, you will specify which assets should be included from your Estate and the names of potential Beneficiaries, but you give power to your Trustees to decide how and when the Trust is going to be distributed and to whom.

This may sound a strange thing to do on the face of it, but there are many reasons why this may be a good idea. If one of your children has a problem with alcohol or with drugs, is very bad with money or has gambling problem, this would probably make you reluctant to leave them a significant amount of money. Whilst they may not be ‘on the straight and narrow’ now, this doesn’t mean they won’t be in the future and this type of Trust allows you to effectively ‘defer’ their rights to the assets until the Trustees feel it is appropriate.

Letter of Wishes for Discretionary Trusts

Of course, you might want to give some guidelines for the Trustees to follow. That is why it is standard practice to leave a Letter of Wishes alongside your Will, in which you can advise when, and in what circumstances, you would like your Beneficiaries to receive their assets. The Trustees can take these wishes into consideration but are by no means bound by them, if they feel it is in the best interests of the Beneficiaries.

One example might be that you wish all your grandchildren to receive their share of the Trust on their 21^st birthday, so long as each is deemed to be capable of handling their own affairs. The Trustees follow these instructions for all your grandchildren bar one, who is not thought to have the maturity to handle a large sum of money. The Trustees fear he/she will fritter it away, so withhold his/her share for another five years, by which point he/she is deemed responsible enough to receive their inheritance.

Protecting Assets

Because the Trustees you appoint will have total control over when to release a beneficiary's inheritance, it enables you to potentially leave assets to people who:

• Cannot manage their own affairs, perhaps because they are not old enough or they are mentally disabled
• Are in receipt of means tested benefits and would lose these benefits if they inherited a lump sum of money outright.
• Are at risk of wasting their inheritance, perhaps because they have an addiction or mental illness
• Are in a relationship with someone that you feel may influence or exercise control over any inheritance if they received it outright.
• Are financially irresponsible and poor with managing money.

This is a huge advantage of a Discretionary Trust, as Trustees can ensure the Beneficiaries are looked after, but you can rest assured that the assets will not be squandered.

In some situations, you can also request that a beneficiary's share is only released in certain circumstances. For instance, if your son has an addiction, you can say that he should only receive his inheritance if he recovers from his illness. If he does not, his share should be divided amongst your other children.

Creating a Discretionary Trust

A common way to create a Discretionary Trust is to incorporate it into your Will. This will give you peace of mind that your Beneficiaries will be taken care of after you are gone.

If you want to know more about Discretionary Trusts, or you are interested in making one, simply let your Co-op Will writer know.

To speak to our Will Writing Advisors call 03306069591 or contact us online and we will help you.

* (Today) The Inheritance Tax threshold for a single person living in England or Wales is £325,000. The Inheritance Tax rate is 40% above the threshold, or 36% if you leave at least 10% of your Estate as gifts to charity in your Will.