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.
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 21st 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.
Trust Wills Calculator
Find out how much you could protect
Trust Wills can be used by co-owners of a property, for example a husband and wife, to protect their home and savings from things such as care home fees and remarriage.
The calculator below tells you how much you could protect.
House value must be between £10,000 and £10,000,000
Beneficiaries must be between 1 and 40
A trust will could protect up to £0*
Including a trust in your will means you can:
Protect up to £0 for each of your children or beneficiaries
When you die, your property will usually go to your partner if you have mirror wills or no will.
If your partner then needs to go into a care home, the entire value of the property can be used to pay for their care home fees (around £40,000 a year).
These fees are taken until there’s £23,250** left. This could have a very big impact on the inheritance you want to pass to your children or other beneficiaries. If you put in place a Trust Will, half your home and savings could be protected in a trust when one of you dies, meaning it is excluded from care home fee calculations. So, there might be more to pass on to your loved ones.
Protect your home from passing to someone other than those you intended
Including a trust can give you control over what happens to your property in the long-term. You can name who you want to inherit the property, whilst allowing someone to live there after your death (but they will not own it). Then, when they die, it will go to the person or people you’ve named.
For example, you could include a trust in your will that says you want your children to ultimately get the property, while allowing your partner to live there for as long as they need.
When your partner dies, your children would get the property. This prevents your share of the property passing to anyone other than the people you want to benefit, for example a new husband/wife if your partner marries after your death.
Ensure your savings and investments provide for your partner during their lifetime, but ultimately pass to your children or other beneficiaries
If you own any savings, shares or investments in your sole name, you can put them into a trust to guarantee who benefits from them.
You can name who you want to eventually get the savings, shares and investments (such as any children) whilst allowing someone else, such as your partner, to get any interest they produce. When that person dies (or on a date that you’ve chosen) the savings, shares and investments will go to the person or people you’ve chosen.
* These calculations assume joint ownership of the house and savings.
** Reference care fees - the £23,250 figure is correct in England as at March 2020 (figures may vary in other parts of the UK)
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.
* (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.
