Are Discretionary Will Trusts Still Necessary?
Discretionary trusts were, until recently, amongst the most popular trust types available. Their efficiency in reducing Inheritance Tax burdens made them the number one choice for many people with relatively large estates.
Changes to the Inheritance Tax rules have meant that this type of trust has recently declined. But discretionary trusts still have a range of uses, and can be of help in a range of circumstances.
What changed?Discretionary will trusts were previously used to address a perceived unfairness in the Inheritance Tax (IHT) schedule. Everyone receives a non-taxable allowance for IHT purposes, known as the Nil-Rate Band. This is set at £325,000 for the 2010-11 tax year. Prior to October 2007, unused portions of this allowance went to waste, as they could not be passed onto a spouse. Discretionary trusts were often established in order to make the most of both partners’ Nil-Rate Band.
Now, though, unused parts of the Nil-Rate Band can be transferred to the surviving spouse or civil partner. This applies to deaths after 9 October 2007. Many people believed that this important change to the law would render discretionary trusts useless. But this type of trust still has a range of uses.
What is a discretionary trust?A discretionary trust arrangement is one in which the assets provided to beneficiaries are not fixed in the trust instrument. Instead, criteria are generally given as instructions to the trustees, who will use their discretion to determine how the assets in the trust are disbursed, and to whom.
Discretionary trusts are often established to help ensure that dependants are provided for after the death of an individual, particularly when those dependants are too young to make their own financial decisions.
Why might I still use a discretionary trustDespite the changes to IHT law, there is a range of circumstances in which a discretionary trust might still be useful. This is a particularly flexible type of trust arrangement, and has a range of applications.
- Unconventional succession. If you have a particularly complex succession plan, a discretionary trust can provide the flexibility you need. This is particularly useful because you can appoint beneficiaries who have not even been born yet.
- Unforeseen circumstances. Discretionary trusts can help to ensure that your dependents’ financial situation is protected from unforeseen circumstances. Trustees have the freedom to appoint assets and beneficiaries as they see fit, within the criteria set out in the trust instrument.
- Asset growth. If you have assets that you anticipate will grow at a faster rate than the increase in the non-taxable allowance, a discretionary trust can help to mitigate the resulting tax burden. It is worth noting that the allowance has been frozen at £325,000 until 2014-15.
How do I set up a discretionary trust?Discretionary trusts are often testamentary, and are therefore frequently outlined in an individual’s will. This can be a complex process, and you should always have a solicitor draft the document for you.
Discretionary trusts may no longer be necessary for those wishing to reduce their Inheritance Tax burden. But they have a range of other uses, and should not be discounted.