Home > Types of Trust > When Would I Use a Discretionary Trust?

When Would I Use a Discretionary Trust?

By: J.A.J Aaronson - Updated: 20 May 2016 | comments*Discuss
Discretionary Trust Inheritance Tax Iht

Discretionary trusts are one of the most potentially useful trust arrangements. Their attractiveness lies in their flexibility; the settlor has significant freedom in setting the terms of the trust.

The unusual aspect of discretionary trusts is the amount of freedom given to the trustees. The assets placed in trust become the property, in title at least, of the trust itself, and the trustees assume responsibility for the management of these assets. In other trust types the ways in which these trustees can act with regard to the assets is very strictly defined; in many cases the trustees are obliged to follow the trust instrument (that is, the document used to establish the trust) to the letter.

In the case of a discretionary trust, however, the trustees must use their discretion to decide which (if any) of the intended beneficiaries should receive income or capital from the trust. They also have the power to decide how much the beneficiaries will receive, and when.

Inheritance Tax

Discretionary trusts are particularly useful for ensuring that inheritance tax (IHT) liabilities are mitigated as far as is possible. As is explained in more detail in an article elsewhere on this site, inheritance tax is only levied on assets in an individual's estate that exceed the Nil-Rate Band, currently set at £325,000. Even then, assets transferred between spouses or civil partners are exempt. However, on the death of the second spouse IHT is charged on the combined estate. As such, if assets are simply transferred to the surviving spouse, considerable IHT exemptions are wasted.

A more efficient course of action is to establish a discretionary trust in the will of the first individual. Under this arrangement, the assets that would otherwise have been transferred to the surviving spouse are instead placed in trust. The spouse is made a beneficiary (or perhaps the sole beneficiary), and trustees are appointed. The beneficiary does not have absolute entitlement to the assets; they cannot demand income or capital as they please. As a result, the assets placed in trust are not treated as part of that individual's estate for tax purposes.

Guidance to Trustees

The settlor should leave a 'letter of wishes' attached to their will. This document contains guidance for the trustees regarding the way in which assets should be disbursed to the beneficiaries. The over-arching theme of this document will normally be that the beneficiary should be sufficiently provided for until their death. As such, the surviving spouse will have access to the deceased individual's assets, but their heirs will avoid a potentially significant IHT bill.

As a result of the relative power given to trustees in a discretionary trust, it is important to think hard about who should be appointed. Depending on the complexity of the settlor's affairs, it is sometimes best to appoint independent commercial executors. This prevents potential confusion if the trustee (who would generally otherwise be a family member or friend) were to die, or become incapable of performing their duties.

It is also important to note that professional advice should always be sought when establishing a discretionary trust, in order to ensure that vital documentation is completed correctly.

You might also like...
Share Your Story, Join the Discussion or Seek Advice..
Can you suggest Firm of Solicitor - cheapest in cost - in London for setting up Bare Trust
Billoo - 20-May-16 @ 8:06 AM
Share Your Story, Join the Discussion or Seek Advice...
(never shown)
(never shown)
(never shown)
(never shown)
Enter word:
Latest Comments
  • Nuts
    Re: What is a Bare Trust?
    My Father-in-law bought a property for my daughter and had it registered in her name.He has since died but left a letter stating that he…
    27 November 2018
  • Nkosazana
    Re: How to Trace Whereabouts of Trust Funds?
    I'm a south African,My was half Swazi born in SA,We got married in Swaziland ,We had serious differences that…
    26 November 2018
  • Pablo
    Re: Revocable and Irrevocable Trusts
    My niece and her husband have bought a flat and put their parents in their to live rent free as my niece owes her parents…
    24 October 2018
  • Professor Trelawny
    Re: What is a Bare Trust?
    I set up a bare trust for my young daughter and bought a buy to let property. My husband and I are both trustees of the bare trust.…
    23 October 2018
  • Amanda
    Re: How to Trace Whereabouts of Trust Funds?
    I have found out that I was left a trust fund many years ago. It was from my grandma many years ago..The rest of…
    17 September 2018
  • Doroto
    Re: Reasons for Establishing a Living Trust
    I would love to know the answer to the question posed by Stephen, namely, whether living trusts can be set up in UK…
    5 September 2018
  • Dee
    Re: Can Conditions Be Put Into Adult Children's Trust Funds?
    My mother passed away lin 2016. Leaving the her estate to me and making it clear to all my…
    31 August 2018
  • Budsalt
    Re: What is a Bare Trust?
    I live in a small block of 4 Flats which is a registered as a Freehold Company. Each flat owner is a director of the Company except 1…
    23 August 2018
  • Bumpy
    Re: What is a Bare Trust?
    Is this site still active? I put a question in on 13th August and then nothing. Thanks
    17 August 2018
  • Bumpy
    Re: What is a Bare Trust?
    A small plot of land of negligible value (say £1000) is held in Bare Trust with a standard Trustee and Sole Beneficiary. If a third…
    13 August 2018