Writing a Will to decide who receives which parts of your Estate when you pass away is stressful work. If you find yourself worrying about how you can ensure your family will have financial stability, then perhaps you should consider a Discretionary Trust.

If you put ‘Discretionary Trusts’ into a search engine you’re presented with a number of definitions riddled with jargon, Our guide is a jargon free round up of Discretionary Trusts.

What is a Discretionary Trust?

A Discretionary Trust is a legal agreement that is formed when you pass ownership of an asset, for example a bank account or life insurance policy to a group of people (known as Trustees), who then look after it in your place. You choose a number of people to benefit from the Trust (known as Beneficiaries) and the Trustees decide which Beneficiaries will receive money from the Trust Fund and when they should receive payment. A Discretionary Trust can be set up immediately (during your lifetime) or by your Will (after you die).

Who is Involved in a Discretionary Trust?

There are 3 people involved with this kind of trust:

  • o The Settlor – The person that originally owned the assets placed into trust. Once an asset has been given to a trust, the Settlor no longer personally owns it and can then become a Trustee.
  • o The Beneficiary – (or Beneficiaries) the people who are entitled to receive money from the Trust Fund in accordance with the terms decided by the Settlor.
  • o The Trustees - Legal owners of the Trust Fund. They must act in the best interest of the Beneficiary or Beneficiaries. When looking after the Trust Fund, they deal with the payment arrangements for any claims made on the trust and decide which Beneficiary to pay, how much and when.

Why would you want a Discretionary Trust?

There are several advantages to using a Discretionary Trust instead of or in addition to a standard Will. You get to retain control over your funds because you choose who is entitled to the Trust Fund and know that the release of money will be controlled by somebody you trust.  This is helpful when leaving money to children because you are able to give them access to financial support, but ensure some of the funds are saved away for later in their life when it may be of greater benefit.

If a Discretionary Trust is set up during your lifetime, payments can be made to the Beneficiaries as soon as the trust has been created. This means there are no delays in making payments after you die. If you leave assets under a Will, your loved ones must usually go through the Probate process before they are allowed to deal with your possessions. This can be a lengthy process and can cause unnecessary stress during a time of grief. However, by setting up a Discretionary Trust during your lifetime, you can ensure your loved ones have immediate access to a source of funds. This can avoid the financial difficulties associated with the Probate process.

The money held in the Discretionary Trust will not be part of your Estate for Inheritance Tax purposes, so you can minimise the amount of Inheritance Tax you’re liable to pay. In terms of Inheritance Tax, you would only be expected to pay when:

  • o The Trust reaches its 10 year anniversary.
  • o When you pay a part of your Estate into the Trust.
  • o When assets are transferred out of the Fund, these are called Exit Charges.

While there are certainly advantages to setting up a Discretionary Trust, they can be disproportionally expensive to administer. There are also Income Tax and Capital Gains Tax issues to take into account.

Fundamentally, you must evaluate whether or not a Discretionary Trust is the best option for you and your family because once the trust has been setup, it cannot be undone.

To arrange a discussion about a new or existing Discretionary Trust, please get in touch with Paul Clark on 01625 523988 or mail@JBGass.com