What is a discretionary trust?
A discretionary trust is a flexible type of trust. The trustees of the trust own the trust’s property on behalf of the beneficiaries. The beneficiaries need not all even be born at the time the trust is created. The trustees can pay out income or capital to any one or more of the beneficiaries entirely at their own discretion. Importantly no beneficiary has a right to demand income from a discretionary trust.
Because of the powers given to trustees in a discretionary trust, it is important to think hard about who should be appointed. Depending on the complexity of the trust’s affairs, it is sometimes advised to appoint independent commercial executors. This can help avoid potential problems if the trustee (who would normally be a family member or friend) were to die, or become incapable of performing their duties.
How do I provide for someone?
The surviving spouse or civil partner can be named as one of the beneficiaries of the trust. The trustees can be empowered to pay out income or the underlying capital to the surviving spouse or civil partner at their discretion. So a surviving spouse or civil partner can enjoy both the income and capital held in the trust.
How do you trustees know what to do?
Usually a ‘letter of wishes’ is drawn up and left with the will. When the time comes it will be read alongside the will, though the wishes noted are not and cannot be binding on the trustees, otherwise the trust would not be discretionary in nature.
It is quite normal for such a letter to state that the principal aim for the trust is to provide adequate provision for the surviving spouse or civil partner. The letter of wishes will usually say what is desired to happen thereafter, such as passing assets to the children or grandchildren.
How does the trust work?
Firstly, the executors (who may also be the trustee) pass the assets that are to be the trust property to the trustees to hold in trust. When they are the same person(s) they simply own the property as trustees as opposed to holding it as executors. The trustees will then need to register the trust with HM Revenue and Customs. The trustees must distribute the assets in the trust in a proper way having regards to the letter of wishes.
Professional advice should always be sought when establishing a discretionary trust, in order to ensure that very important documentation is completed correctly.
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