Setting up a trust is a safe way of protecting your money for the future. However, there are many different types of trusts available. Which one should you choose? What are the differences between them all? Our Wills and probate team explain what a Discretionary Trust is and the benefits of setting one up.
What is a Discretionary Trust?
A Discretionary Trust is a form of trust which can be set up by an individual or couple (the settlor or settlors). Two or more trustees manage the assets held in the trust for a number of potential beneficiaries. An individual can either create a Discretionary Trust in their lifetime or by will.
How is a Discretionary Trust created?
If a settlor creates a Discretionary Trust in their lifetime, a Trust Deed must be signed by settlor and all the trustees. After signing the deed, the assets that are held in trust are transferred into the trustee’s names.
If a Discretionary Trust is created by will, assets are held on trust on the death of the settlor. The will states the terms of the trust and so acts as the trust document. Assets held on trust are transferred into the trustees names on the death of the settlor.
A settlor usually prepares a Letter of Wishes for the trustees setting out how the Discretionary Trust should be dealt with. Although not legally binding, the Letter of Wishes states the settlors wishes and purpose of the trust.
Why consider using a Discretionary Trust?
A Discretionary Trust has many uses such as:
- Protecting a beneficiary’s money if they are financially unstable. The trustees can distribute to the beneficiary as and when appropriate.
- Safeguarding money from a beneficiary who is going through a divorce settlement. Trust funds generally can’t be treated as belonging to a beneficiary as they are not outright entitled to the trust fund.
- Tax saving reasons. A Discretionary Trust can be used to ensure Agricultural Property Relief (APR) and Business Property Relief (BPR) is fully utilised.
- Protecting benefits of a disabled beneficiary. Trust funds cannot be considered when assessing means tested benefits. This is because the beneficiary is not absolutely entitled to the trust funds.
Who can act as Trustee?
Anyone can act as a trustee including a beneficiary or the settlor of a trust set up during the settlors lifetime. The settlor can appoint professional trustees to ensure that the fund is properly managed. However, some individuals subject to bankruptcy or a conflict of interest may not be so suitable.
Who are beneficiaries?
The settlor chooses who can benefit from the trust fund. This can be named individuals, classes of people or causes. The beneficiaries are known as ‘Potential Beneficiaries’ as they are not entitled to the trust fund. They are the people or causes who the trustees may decide to distribute the fund to. Until the trustees use their discretionary powers to give some of the fund to a beneficiary, the funds remain within the trust. There must be at least two beneficiaries named in a Discretionary Trust. There is a special type of discretionary trust that can be set up primarily for the benefit of a disabled beneficiary.
How is money held in Trust?
Trust funds can be held in the form of investments, cash or property. It is advisable for trustees to seek advice from a professional if they choose to invest trust funds.
Want more information? Get in contact.
If you would like more information on Discretionary Trusts or any other trust, we can help. Contact our wills and probate department now on 0800 988 7756. Alternatively, email info@levisolicitors.co.uk
