DISCRETIONARY TRUSTS

Flexibility and protection

Why would I consider doing a Discretionary Trust?

Having the flexibility to control who inherits, when and how much can be very useful. For example, what might happen where money is left or given to a child who later gets divorced or goes bankrupt? What could happen if a client is estranged from one of their children, and excludes them in their Will but circumstances change later? Is it wise to leave money to somebody who has an addiction to gambling or drugs?

Assets left in a Discretionary Trust are protected in all of the above situations. The inheritance of the child who gets divorced, would not pass to their spouse. The monies intended for the child who later goes bankrupt, would not be lost through bankruptcy.

The future is uncertain. Providing inheritance through a flexible discretionary trust can be far more effective than transferring assets directly to beneficiaries.

What are the benefits?

GREATER FLEXIBILITY

If you are not sure how to distribute assets in your Will, you could instead allow trustees to decide what to do for the best after you have passed away.

 

One of the beneficiaries may be in greater need than another, or a child may wish for their own children to benefit instead. A discretionary trust can help in these situations.

PROTECT ASSETS

Assets that are held on trust are protected against changes in beneficiaries’ circumstances; ensuring that assets can be kept within the family even if a beneficiary goes bankrupt or gets divorced for example.

REDUCE TAX

As Discretionary Trusts are very flexible, there are many ways that they can be used in the long-term to reduce Income Tax, Inheritance Tax and Capital Gains Tax.

AVOID CHALLENGES

Rather than excluding a person in your Will, consider making them a beneficiary of a Discretionary Trust instead. This will allow your trustees to decide what to do in the long-term.

KEEP CONTROL

By providing your trustees with details as to how you would like the trust assets to be used, you can keep control even after making the gift. This ensures that assets are used in the way that you wanted them to be.

VULNERABLE BENEFICIARIES

If one of your beneficiaries is considered to be vulnerable, a Discretionary Trust can ensure that their inheritance is protected for them. The trustees would be able to manage their inheritance, and also protect their entitlement to State Benefits or Social Care.

Frequently Asked Questions

By having a Property Protection Trust (PPT) you are ensuring that your home, which is your most valuable asset, passes to your chosen beneficiaries regardless of what the future holds. If this is your goal, a PPT could help.

By making a Will, you are ensuring that your family will be taken care of and making the administration process much simpler.

Some people consider giving their property to someone else, such as a child, so that the asset won’t be counted for a care fees assessment. However, this may be viewed as a deliberate deprivation of assets, and you would then have to pay the same level of care fees as if you still owned the property.

Also, if your child’s circumstances were to change during their lifetime, you run the risk of losing the property and becoming homeless. For example, if your child went through bankruptcy, a divorce or they passed away, you may no longer be able to live in the property as the asset would be in their name and could be taken.

As a result, we would never recommend transferring a property into the names of children, or a third party without meticulous planning and advice.

Things are also more time-consuming and complex when a Will is not in place. This can cause additional stress for your family, at what is already a very difficult time.

Under the Wills Act 1837, in order for a Will to be legally binding it must be:

– made by a person who is 18 years of age or older, and who has their mental capacity;
– in writing; signed by the person making the Will and witnessed by two independent people;
– made of the person’s own volition, without pressure or coercion.

A witness cannot be a beneficiary of the Will, nor married to someone who will benefit. We normally advise that clients use close friends or neighbours as witnesses.

The witnesses are there to confirm that the Will was signed by the testator (the person making the Will), and that they knew what they were doing i.e. they were not under any undue influence or pressure to do so.

“Mirrored” Wills are commonly made by unmarried or married couples. Each person has their own document, but the wishes contained within them will be pretty much identical. For example, a “mirrored” Will may say that a couple want to leave everything to each other first, but then when both of them have passed away, the estate should pass to their children.

This is a term used to describe what assets of yours are left after any gifts, debts, tax funeral costs and other testamentary expenses have been paid.

The remainder of your assets are then distributed to your beneficiaries. This could include: your bank accounts, property and personal possessions.

Your residuary estate does not include things such as jointly owned property or bank accounts. It would also not include pensions or life insurance policies that have been written into trust – you would normally have nominated someone to receive these when you set them up.

You have to be at least 18 years of age to receive any inheritance that you may have been left. Sometimes clients feel that 18 years of age is still too young, and will instead opt for 21 or 25. Where a person is under the age of 18 (or whatever age you have specified), their inheritance would be looked after for them by trustees. The trustees would have the discretion to distribute money to them as and when they see fit. Once the child has attained the age of 18 or older, they will then become responsible for their inheritance and make all the decisions for themselves.

An Executor is someone who deals with the administration of your estate. You will appoint these people in your Will, and they are most likely to be close relatives or friends. For more complicated estates, it is not uncommon for someone to appoint a professional to act as their Executor.

An Executor is responsible for the following:
– Finding your Will;
Locating and valuing your assets;
Paying off any debts that there may be at that time;
Distributing the remainder of your assets (your residuary estate) to your beneficiaries.

A trustee is someone who looks after your property until a given time in the future. For example, where money has been left to a child, and they are unable to inherit until they attain a certain age.

Trustees must act with honesty, and integrity. Their responsibilities include: taking control of trust property, to safeguard such property and to act in the best interests of the beneficiaries.

A guardian is someone that you appoint to look after your child/children if something happens to you whilst they are under the age of 18.

If you pass away leaving young children, and you have not appointed a guardian, it will then become the role of the courts to find someone suitable to care for them. This could mean that someone other than who you would like is appointed to look after them.

No, but it is a good way of letting your executors what kind of funeral you would like. We would recommend that you discuss your preferences with your family too.