Discretionary Trust Wills

Ian Winterbotham explains what we need to know about a discretionary trust will.

What is a discretionary trust?

You can think of a trust as a great big safety deposit box, big enough to take all your assets: your home, your savings and your investments. The trustees have the keys to get into your giant safety deposit box and distribute those assets.

All the trustees must agree – so, imagine there is a separate lock for each trustee to open – and each trustee has a different key. All the trustees must be present and all the trustees will have to sign documents to distribute the assets.

As the testator, you decide who will be the trustees. These could be your husband or wife, your children or maybe a trusted friend or professional advisor. You should think carefully about who you choose and ensure that you trust them to carry out your wishes.

You can also write a letter of wishes to guide your trustees as to how you want them to distribute the assets. The emphasis, really, is on the word trust – because your trustees will have discretion to decide who benefits and how.

Who is a discretionary trust will for?

A discretionary trust will is for anyone who wants to protect their assets from certain threats. You may wish to protect your estate from being lost through divorce or bankruptcy, or you may worry that your beneficiaries may not manage their inheritance wisely. In some cases, your beneficiaries could lose entitlement to means-tested state benefits.

To run through a few of the most common um reasons for making discretionary trust wills, the first one would be divorce. If any of your children get divorced after you’ve died, they face the prospect of losing a large part of their inheritance in a divorce settlement. Setting up a discretionary trust in your will avoids this problem, by keeping your assets for your own bloodline.

Another reason would be bankruptcy – in the same way, if you leave your assets in a discretionary trust, your children will not lose their inheritance should they go bankrupt. Funds still sitting in the discretionary trust cannot be taken into account for assessment by the court in bankruptcy.

If your children have problems such as alcohol, drugs, gambling or just plain overspending, a discretionary trust will put some independent control in place over their inheritance. You’re not depriving your children, but making sure that the money lasts a bit longer.

Then there is vulnerability and loss of mental capacity, which can apply should your funds pass to children or grandchildren who are vulnerable due to certain conditions, illnesses or accidents, or who as they get older become vulnerable to unwise decisions and fraudsters.

A discretionary trust can ensure that the inheritance is available for your beneficiaries should they require it, without running the risk of depletion or being unable to access the funds without a Court of Protection Deputyship order.

Finally, any beneficiary who’s receiving means-tested benefits may be able to continue to receive those benefits, while having their inheritance protected in the discretionary trust created by your will.

Who can be a beneficiary?

You choose the beneficiaries – so they can be family, friends or charities.
Who owns the money in a discretionary trust?
The property, savings and investments are assets of the trust that’s created by your will. Your chosen beneficiaries should get access to the money in due course. Your trustees are the legal owners, but they are not legally allowed to benefit from the assets, unless they are beneficiaries as well.

Do you pay inheritance tax on a Discretionary Trust?

Although it’s not effective to save inheritance tax on your death – i.e. the death of the person writing the will’s – the trust would protect the assets for your children and grandchildren or other beneficiaries.

This will be of particular benefit if your children or other beneficiaries are likely to be over the inheritance tax threshold when they die. The trust allows your beneficiaries to borrow all the assets, use them and enjoy them, without them ever becoming part of their taxable estates – so you can save inheritance tax on a generational basis.

Does a discretionary trust end on death?

No, not not at all. The discretionary trust created by your will can last for 125 years.

It can last for your children, your grandchildren, your great-grandchildren and so on, to protect the inheritance you’re leaving. However, if your beneficiaries decide that they no longer want or need the trust, it can be disbanded at an earlier date if the trustees and beneficiaries agree.

How much will a discretionary trust will cost?

We charge £645 plus VAT for a discretionary trust will for a single person [podcast recorded in May 2024]. For a couple we would need to talk a little bit more. You might want to listen to the podcast on double trust wills, and flexible family trust wills, or even triple trust wills.
Effectively, the benefits are very similar to what I’ve just described.

What are the benefits of a discretionary trust, and are there any risks?

Basically, the benefits are that a discretionary trust will protect your assets and save inheritance tax on a generational basis. In terms of the risks, your trustees have discretion so you must choose your trustees carefully.

There could be administration costs if you feel your children or close friends are not suitable as trustees. The other benefits and risks have been covered already.

When can I set up a discretionary trust and how does the process work?

The simple concept is that the trust is created by your will. The will that you sign and get witnessed creates the trust when you die – that is the trust document. There is no further cost to set up the trust, as you’ve done it already.

There is one potential further cost which is a legal requirement now, that one of the trustees will need to register the trust at HMRC. This lead trustee will need to keep the trust records updated in terms of the beneficiaries and the trust assets in the future.

What else do we need to know about discretionary will trusts?

You can minimise the administration costs by lending the assets out of the trust to the beneficiaries. This is quite a big concept for some people.

You’re creating a trust when you die, which might hold your home, your ISAs, cash and investments in it. The home can be kept or it can be sold. The savings and investments and ISAs will usually be cashed in, and the money from the sale of the property, investments and savings can then be given to your beneficiaries.

They can spend them however they like. But in exchange for that, they will write a deed saying that this money has been borrowed from the trust created by your will. So they can have their cake and eat it. If there’s no money left when they die, they’ve spent their inheritance.

But if they do buy their own home and have assets which are taxable, in theory, when they die there will be no tax to pay on the money you’ve left in your discretionary trust will to them. It’s been a loan from the trust. That can save a lot of inheritance tax and also protects the assets from being lost on divorce or bankruptcy.

If, on the other hand, assets are not lent out to the beneficiaries and they generate income or capital gains, the lead trustee will be under an obligation to produce trust accounts and pay any relevant taxes. So one should be aware of that.

But generally, most of our clients find there’s no need to budget for accountancy fees. If there are investments and savings which don’t go directly out of the trust to the children to spend, they can be placed in an investment bond. That can often avoid the need for official accounts until the initial value of the inheritance is used up, or distributed.

So all in all, this can be a really good thing to do – and has been established in law since Dickens’ times.