Discretionary Trusts - How can I make sure each beneficiary gets what I want them to?
Updated: Apr 1
By its nature, a Discretionary Trust must name a number of beneficiaries (people or charities) who can benefit from the assets held in Trust. This could be by specifically including beneficiaries by their name or by group such as ‘my children’ or ‘my grandchildren’. The Settlor (the person who creates the Trust in the first place) will often have an idea about how they would like each of the beneficiaries to benefit from the Trust assets. Perhaps they feel one of their children will be in more need of financial help, or they would like the Trust to be able to provide help with the costs of education for their grandchildren in the future, should the opportunity arise.
You won’t be surprised to read that distributions made to beneficiaries under a discretionary are made at the discretion of the Trustees, hence the name ‘Discretionary Trust’. The Settlor names the beneficiaries or groups of beneficiaries that could benefit from the Trust, but it is down to the Trustees to decide whether they actually receive anything and, if so, how much this should be. Understandably this could worry a Settlor who may have strong views about what should happen to the assets held in the Trust and although the Settlor cannot force the Trustees to do one thing or another, there are steps a Settlor can take to influence what decisions the Trustees make;
Write a Letter of Wishes – a Letter of Wishes (LOW) informs the Trustees of the reason why you set up the trust in the first place and what you would like to happen with it. This can be as detailed as you like (often the more detailed the better) and you can provide your trustees with guidance on what you would wish to happen in specific circumstances. A LOW is extremely useful for Trustees and can always act as a reference point for them before making any distributions. Although a LOW is not legally binding on the Trustees, it is rare for a Trustee not to take into account the wishes of the Settlor.
Choose your Trustees wisely – when deciding who to appoint as your Trustees think carefully about the person(s) you would like to act for you. Ask yourself whether they are likely to follow your wishes? If they are also a named beneficiary, will this influence their decisions? Also, you could consider appointing a professional Trustee, who will always be able to remain impartial and make decisions for the best interest of the Trust and all the beneficiaries.
Appoint yourself as a Trustee too – it is possible to appoint yourself as a Trustee whilst you are still alive and capable of doing so. It will be important that you consider whether you are happy to take on all the responsibilities of being a Trustee before you do so and consider carefully who you would like to act alongside you.
If you are considering creating a Discretionary Trust, it is also important to remember the benefits of your Trustees being able to use their discretion. Your Discretionary Trust could exist for many, many years and things could change considerably as life moves on. Your Trustees will be able to make decisions based not just on any wishes you provide but also taking into account the circumstances at the time.