What is a Discretionary Will Trust?
A discretionary trust is one of several types of trusts that you might consider when writing your last will and testament. By leaving your estate to a trust in your will, you give the responsibility to your trustees to decide how your assets are distributed to beneficiaries, which can be advantageous in some circumstances and for certain types of estates.
While a trust will not be suitable for everyone’s will, there are reasons why some people choose them - for example, they can help to manage assets on behalf of beneficiaries who do not have the capacity to do so on their own, or enable you to choose as beneficiaries people who have not been born yet.
To help make sense of this estate planning option, Clough & Willis’ probate team have written this blog to answer some fundamental questions: what is a discretionary will trust, how much control do trustees have over your assets, and how do you know if a discretionary trust is right for you?
How does a discretionary trust work?
By specifying in your will that you wish to leave your estate to the care of a discretionary trust, you can enable a number of nominated trustees to continue to manage your assets after you die. They can distribute your assets to beneficiaries at their discretion - but only to beneficiaries that you specify beforehand. You can name specific beneficiaries, classes of people (such as “grandchildren”), or other groups, which means that by creating a discretionary trust you can allocate your assets to people who haven’t been born yet.
If you wish to establish a discretionary will trust, you will need to take care when choosing your trustees. The trustees will ultimately decide how your assets are distributed to your beneficiaries, so you need to ensure that they understand your desires and can be trusted to execute them faithfully.
You must also make sure that there are no conflicts of interest that would prevent trustees from executing their duties. There is no law to prevent your trustees from being named beneficiaries of the will, but you may wish to include some trustees who do not stand to financially benefit from the trust as a means to address these conflicts of interest. You may wish to nominate a solicitor or other professional to fulfil this function.
When you die, your discretionary trust will have the right to distribute your estate - or, however much of your estate you have allocated to the trust’s management - however it sees fit. The trust has the power to act at its discretion, as is implied by the name ‘discretionary trust’, and this means it is important to select people you can rely on, and leave specific instructions about your wishes for the management of the trust.
What are the advantages of a discretionary trust?
If you have a large estate, you may owe inheritance tax (IHT) that your beneficiaries will have to pay out of the value of your estate. One advantage of putting your assets into a discretionary trust is that it can reduce the amount of IHT your descendants will owe on your estate, because it affects how your estate is valued and assets withdrawn from the trust are taxed at a lower rate than the 40% rate of IHT.
There may be other tax benefits associated with creating a trust, so you should speak to an expert solicitor or financial adviser for more insights into what you could gain by taking this step. In particular, there are options for bequeathing property that can offer tax relief. For example, you can reduce the taxable value of assets by splitting their ownership with the trust, or move the control of assets from a spouse to the trust, which can account for any expected increases in value.
There are also disadvantages to a discretionary trust, including the fact that you will lose control over your assets and not be able to make specific decisions about how your loved ones should benefit after you die. For this reason, it is vital to speak to an expert probate solicitor when you want to establish a discretionary trust, or if you want to explore other options that might be appropriate for estate planning.
To speak to the probate experts at Clough & Willis Solicitors, call us on 0161 764 5266 or complete the quick enquiry form on this page to request a call back.