A discretionary trust is a legal arrangement used to control and manage assets for the benefit of the beneficiaries. Assets, such as land, buildings or money, are known as “trust property”. The trust is managed by appointed trustees; these are the people who look after the trust for the beneficiaries. Their main objective is to follow and carry out the terms of the trust and allocate the funds amongst the beneficiaries.
A trust is usually created by a Will, however, unlike a Will it is not legally binding. The powers of the trustees will depend upon what powers were decided under the Will. Often the person who instructed the trust to be set up will also leave a “letter of wishes” or “memorandum of wishes” setting out how they would like the trustees to exercise their powers.
When are Discretionary Trusts used?
They can be used where a beneficiary is vulnerable or incapable of seeing to their own financial affairs. The flexibility of a discretionary trust may allow the trustees to provide financial support to a beneficiary at a crucial time of their life – such as to fund their education. Discretionary trusts can also be used as a means of mitigating, as far as is possible, an estate’s liability to Inheritance Tax. In many cases the beneficiaries will not have to pay this tax.
Who should be appointed as a Trustee?
You can have more than one trustee. Since the trustees under a discretionary trust have a broad range of powers, it is important to give careful consideration as to who should be appointed. They should be people who the settler believes will act in the best interests of the beneficiaries and importantly get along with each other so that decisions can be made together. If an estate is of high value or is complex, it may be sensible to assign an independent professional trustee.
For more info on this, please see our Guide to Trustees of Discretionary Trusts.