What Is a Discretionary Trust & How Can It Help You?

A Discretionary Will Trust is a very flexible way of leaving your estate to your loved ones. It could be that your beneficiary’s situations are in a state of flux, and you don’t want to be too prescriptive in the way you leave your Estate to them. Perhaps you are aware that your children’s marriages are not happy ones, or you own a business that your children cannot decide if they want to take over after your days. A traditional Will can be very binding and not allow the wriggle room that could be needed after your death. 

How do Discretionary Trusts work? 

The Testator (person making the Will) can pass all or part of their assets to Trustees to hold on discretionary Trusts for the benefit of several specified beneficiaries. This means that during the Trust period (typically 125 years from the Testator’s death) the Trustees have discretion over how the assets in the Trust and their income are distributed amongst the beneficiaries. 

  • You will need to appoint two Trustees (people you know, love and trust – to manage your affairs when you are no longer around).  Ideally, they should be independent of your beneficiaries.
  • We will help you write a Letter of Wishes which is a detailed letter advising your Trustees of how you would like your estate to be administered after your death and the terms you would like applied to your Trust. Please be aware that this is not legally binding on your Trustees and whilst they would endeavour to act on your wishes, there may be times where their actions could be different to those you had originally requested during your lifetime due to a change in circumstances after your death. 

Are there any tax implications to using a Discretionary Trust? 

One of the main differences between leaving an outright gift to an individual, or a gift to a Will Trust where the beneficiary is entitled to the income, is that the assets in a Discretionary Will Trust are not taxed on a beneficiary’s death. If the assets in the Trust are over the Inheritance Tax threshold, there will be a taxable charge of 6% every ten years and when capital leaves the Trust, making it far more tax friendly way of leaving assets to loved ones.

There are lots of other benefits too, including:

  • If children are divorcing at the time of your death and were to inherit part (or all) of your Estate, this would form part of the divorce settlement and they would lose that share.
  • Children would lose state benefits if they inherited a lump sum with disabled or dependent relatives potentially losing their home if not left to them in a Trust.
  • Your children may have an Inheritance Tax (IHT) issue of their own. By leaving their inheritance in Trust, it will not form part of their Estate so not attracting IHT.
  • If your child died and their spouse remarried, everything you had worked for could pass to another family, leaving out your grandchildren. This is known as sideways disinheritance.

The Important Part!

If you own your property jointly with your partner or spouse, we sever the tenancy at Land Registry and change the ownership into tenants in common, so that you each own your respective half of your home in equal shares.  This means that on first death, that half of the property drops into a Trust in your Will and is protected if your spouse or partner chose to remarry in years to come or developed a care need.

It is normal to make your spouse or partner the Primary Beneficiary of the Trust, meaning they continue to live in the house until their death and can use any income generated from your property or investments to maintain their lifestyle. 

When your spouse/partner passes away, their share of the estate falls into the Trust in their Will and is then passed to the beneficiaries on second death.

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