Discretionary trusts can be a useful tool for people who want to provide for their loved ones after they pass away while maintaining control over how their assets are used. This type of trust is often used in wills, and can be particularly helpful for individuals who have complex family structures or beneficiaries with special needs.
So, what exactly is a discretionary trust?
A discretionary trust is a type of trust where the trustee has discretion over how the trust assets are used and distributed to the beneficiaries. The beneficiaries do not have a fixed entitlement to the trust assets, but the trustee can use their discretion to provide them with financial assistance as and when they need it.
When creating a discretionary trust in a will, the testator (the person making the will) will appoint a trustee who will have control over the trust assets after their death. The trustee can then use their discretion to distribute the assets to the beneficiaries, taking into account their individual needs and circumstances.
Why use a discretionary trust in a will?
There are several reasons why someone might choose to use a discretionary trust in their will:
To provide for family members with complex needs
If a testator has family members who require long-term care or have a disability, a discretionary trust can provide ongoing financial support for them after the testator's death. The trustee can use their discretion to ensure that the beneficiaries' needs are met without jeopardising their eligibility for means-tested benefits.
2. To protect assets from potential creditors
If a beneficiary is at risk of being pursued by creditors, a discretionary trust can protect the assets from being seized. This can be particularly useful if the beneficiary has a high-risk profession or is going through a divorce.
3. To provide for minor children
A discretionary trust can be used to provide for minor children until they reach a certain age or until a specific event occurs, such as completing their education. This can ensure that the children's needs are met without giving them access to a large sum of money before they are ready to handle it.
4. To preserve family wealth
A discretionary trust can be used to preserve family wealth by ensuring that the assets are passed down to future generations in a controlled manner, potentially avoiding further Inheritance Tax. The trustee can use their discretion to ensure that the assets are distributed fairly and in a way that aligns with the testator's wishes.
A letter of wishes should accompany the trust.
In addition to creating a discretionary trust in their will, testators should also write a letter of wishes to accompany the trust. A letter of wishes is a private document that sets out the testator's wishes and intentions regarding the trust. It provides guidance to the trustee on how to use their discretion when making distributions to the beneficiaries. While the trustee is not legally bound by the letter of wishes, it can be a valuable source of information for them and can help to ensure that the trust assets are distributed in a way that aligns with the testator's wishes.
A letter of wishes can be particularly useful in situations where the testator has complex family relationships or where the beneficiaries have specific needs or circumstances that the trustee should be aware of. For example, the letter of wishes could provide guidance on how to provide for beneficiaries with disabilities, how to distribute assets fairly between multiple beneficiaries, or how to manage assets in a way that supports the testator's philanthropic goals.
The letter of wishes can also be updated over time to reflect changes in the testator's circumstances or wishes. This can provide flexibility for the trustee and ensure that the trust remains aligned with the testator's intentions even as circumstances change.