A discretionary trust is a valuable tool which can be tailored to suit your personal circumstances, ensuring that your estate is used for the benefit of your loved ones.
Such trusts can either be set up during your lifetime, or under your will, depending on your specific requirements. What are the potential benefits?
Reducing your estate for inheritance tax purposes
Giving assets away during your lifetime will reduce the value of your estate and may, in turn, reduce the amount of inheritance tax that is paid. While it is always possible to gift assets directly to one or more individuals, this may not be a practical solution in many cases. For example, the intended recipients may be very young or they may have a disability that renders it difficult for them to manage funds themselves.
Putting assets into a discretionary trust during your lifetime will remove those assets from your estate so that when you die those assets are not included in the assessment for inheritance tax.
Providing for family on your death
You may have young children or children who you believe would not be sufficiently mature to inherit a substantial sum on your death. Alternatively, you may have concerns that if you leave your entire estate to your surviving spouse, they may remarry and benefit their new partner to the detriment of your children.
By placing assets in trust, you can benefit your spouse and protect your children, as your trustees would have the discretion as to when to release capital or income, how much to release and to whom.
You may also want to make provision for a child who is going through divorce proceedings. If you were to leave a sum of money or property to that child directly, the child would be treated as owning the asset and it would then be vulnerable to being shared out as part of any financial settlement.
A discretionary trust created under a will is a useful tool for protecting children who have a physical or mental disability. The beneficiaries under the trust are “discretionary” and are therefore not absolutely entitled to receive anything. Therefore, if a child were in receipt of means-tested benefits, the assets held in the trust should not be taken into account when assessing the child’s entitlement to those benefits. Where a discretionary trust is created in these circumstances, the trustees can make decisions to meet the changing needs of the disabled child during their lifetime.
When drafting your will, it can be difficult to predict what each member of your family may need following your death, particularly if you have young children at the time. A discretionary trust created under your will, allows your trustees to determine how best to divide the capital and income of your estate, depending on the circumstances at the time of your death.
If, for instance, the trustees are confident following your death that your children are sufficiently mature enough to receive a substantial sum, then the assets could all be appointed out and the trust need not be formally established.
Trusts can be complex and there are additional administration requirements and possible tax consequences, but they can be extremely useful tools and should be considered as part of your estate planning.