Discretionary Trusts (UK)
Flexible estate planning that allows chosen trustees
to decide how and when trust assets are used for
your beneficiaries.
What is a discretionary trust?
A discretionary trust is a trust in which the
trustees have discretion over how and when trust
income or capital is distributed among a group of
potential beneficiaries, subject to the terms of
the trust.
In simple terms, you choose the potential beneficiaries,
but the trustees decide who should receive money or
assets, when they should receive them and how much
should be distributed.
Unlike leaving an inheritance directly to a named
beneficiary, a discretionary trust does not necessarily
give each potential beneficiary an automatic entitlement
to a particular share of the trust fund.
This can provide useful flexibility where you know who
you want to benefit but cannot predict their future
circumstances.
How does a discretionary trust work?
Assets are held by trustees who manage the trust and
exercise their discretion over distributions to eligible
beneficiaries in accordance with the trust terms and
their legal duties.
The trust document identifies the beneficiaries or
classes of people who may benefit and sets out the
powers available to the trustees.
STEP 01
Choose the beneficiaries
Define the individuals or groups of people who
may benefit from the trust.
STEP 02
Appoint trustees
Choose people who can responsibly manage the
assets and make decisions about distributions.
STEP 03
Trustees exercise discretion
Trustees consider the beneficiaries'
circumstances and decide when appropriate
distributions should be made.
Who owns the assets?
The trustees hold legal title to the trust assets
and must administer them in accordance with the
terms of the trust and their duties as trustees.
Do I need a discretionary trust?
A discretionary trust may be worth considering
when you want several people to potentially benefit
from an inheritance but want your trustees to retain
flexibility over who receives assets, when they
receive them and in what amounts.
They can be particularly useful where future family
or financial circumstances are difficult to predict.
You have several beneficiaries
Trustees can consider the circumstances of
different beneficiaries rather than dividing
everything into fixed shares immediately.
Your beneficiaries are young
You may not want a substantial inheritance
passing outright at a particular age.
Future circumstances are uncertain
Flexibility may be useful where you cannot know
today which family members will need the greatest
support in the future.
You have a blended family
A discretionary structure may provide flexibility
where several family members could potentially
benefit.
A beneficiary may need additional support
Trustees can consider individual circumstances
when deciding whether and how to make distributions.
You want ongoing control and flexibility
Assets can remain under trustee management instead
of passing outright immediately.
Who can benefit from a discretionary trust?
A discretionary trust can name individual beneficiaries
or define classes of potential beneficiaries, such as
children, grandchildren or other family members.
The precise beneficiaries are defined by the trust
document.
The trustees can then consider the circumstances of
eligible beneficiaries when exercising their powers.
Can a beneficiary demand their inheritance?
A discretionary beneficiary does not normally have an
automatic right to demand a particular payment or share
simply because they are included within the class of
potential beneficiaries.
The trustees must exercise their discretion properly,
taking account of the trust terms and their legal duties.
What is a Letter of Wishes?
A Letter of Wishes can give trustees additional guidance
about how you would like them to exercise their discretion,
although it is generally separate from the legally binding
terms of the trust.
For example, you might explain that you would like trustees
to consider helping a beneficiary with education, housing
or other particular needs.
It can also explain why you chose the trust structure and
provide useful context about your family circumstances.
Why this matters:
The trust provides the legal framework. A Letter of Wishes
can provide your trustees with additional context when
exercising the discretion you have given them.
Can I put a discretionary trust in my Will?
Yes. A Will can include a discretionary trust that takes
effect after death, allowing specified estate assets to
be held by trustees for a defined group of potential
beneficiaries.
This can be useful where you want to establish the
framework now but allow your trustees to respond to
circumstances as they exist after your death.
For example, rather than leaving your estate in fixed
percentages to several children, the Will could potentially
direct relevant assets into a discretionary trust for a
defined group of beneficiaries.
Important:
A discretionary trust can involve continuing trustee,
administrative and tax responsibilities. It should not
be added to a Will simply because it sounds more protective
than an outright inheritance.
Discretionary trust vs direct inheritance
| Issue | Direct Inheritance | Discretionary Trust |
|---|
|
Ownership |
Assets pass directly to the beneficiary. |
Trustees hold and manage the trust assets. |
|
Fixed entitlement |
Beneficiary generally receives the inheritance
specified for them. |
Potential beneficiaries do not necessarily
have a fixed entitlement to a particular share. |
|
Control |
Beneficiary controls assets once received. |
Trustees exercise control subject to the
trust terms. |
|
Future flexibility |
Limited once the inheritance has passed. |
Trustees may respond to changing beneficiary
circumstances. |
|
Administration |
Generally simpler once the estate is distributed. |
Ongoing trust administration may be required. |
What are the advantages and disadvantages?
The main advantage of a discretionary trust is flexibility.
The trade-off is greater complexity, trustee responsibility,
administration and potentially different tax treatment
compared with an outright inheritance.
Potential advantages
-
Flexibility between beneficiaries.
-
Trustees can respond to changing circumstances.
-
Assets do not have to pass outright immediately.
-
Can provide longer-term management of assets.
-
Useful where future beneficiary needs are uncertain.
Potential disadvantages
-
More complex than an outright inheritance.
-
Trustees have ongoing responsibilities.
-
Trust administration may create additional costs.
-
Separate tax rules can apply.
-
Beneficiaries do not necessarily control when
they receive assets.
How are discretionary trusts taxed?
Discretionary trusts have their own tax rules, and
inheritance tax, income tax and capital gains tax may
all need to be considered depending on the trust,
its assets and the transactions involved.
The tax treatment of trusts can differ significantly
from assets owned personally or inherited outright.
Tax rules and allowances can also change, so the
consequences should be considered using the legislation
and rates applying at the relevant time.
Tax advice:
A discretionary trust should not be established on the
assumption that it will automatically reduce inheritance
tax or provide another tax advantage. Specialist tax
advice may be appropriate depending on the assets and
circumstances involved.
Key Takeaways: Discretionary Trusts
-
● Trustees decide how and when eligible beneficiaries
benefit, subject to the trust terms.
-
● Potential beneficiaries do not necessarily have a
fixed entitlement to a particular share.
-
● They can provide flexibility where future family
circumstances are uncertain.
-
● A discretionary trust can be included within a Will.
-
● Greater flexibility comes with additional trustee,
administrative and tax considerations.
Frequently Asked Questions About Discretionary Trusts
Who controls a discretionary trust?
The trustees manage the trust assets and exercise the
powers given to them by the trust document, subject to
their legal duties.
Can a beneficiary demand money from a discretionary trust?
A discretionary beneficiary does not normally have an
automatic right to demand a particular distribution.
Decisions about distributions are made by the trustees
in accordance with the trust terms and their duties.
Can trustees give everything to one beneficiary?
This depends on the powers and terms of the particular
trust. Trustees must exercise their discretion properly
and consider relevant beneficiaries rather than acting
arbitrarily.
Can my children be beneficiaries?
Yes, children can potentially be included within the
class of beneficiaries, along with other individuals
or groups specified by the trust.
Can I include future grandchildren?
A trust can potentially define beneficiaries by class,
which may allow future family members to fall within
the beneficiary group depending on the drafting.
How long can a discretionary trust last?
The duration depends on the trust terms and the legal
rules applying to the particular trust. The intended
duration should be considered when the trust is drafted.
Is a discretionary trust right for everyone?
No. Many people are better served by a straightforward
Will and direct inheritance. A discretionary trust is
more likely to be relevant where flexibility, ongoing
management or complex beneficiary circumstances justify
the additional administration.
Do you need a discretionary trust?
Speak with Andrew Walters MSWW for a no-obligation
discussion about your family circumstances and whether
a discretionary trust is appropriate for your estate plan.
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