Discretionary Trusts – Is it a matter for life or death?
Updated: Apr 10
I am sure that you won’t be surprised to read that discretionary trusts, like most other trusts, can be created during your lifetime or can be written into your Will to come into effect once you have passed away. You may, however, wonder whether there are any benefits to waiting until death before your trust is created?
The answer to this will be dependent on the reason you want to create a discretionary trust and what you wish to achieve.
Discretionary trusts are commonly used because of their ability to be flexible. A settlor (the person who creates the trust whether in their lifetime of on their death) chooses a number of beneficiaries (whether this is named individuals or a group of people such as ‘my grandchildren’) and it will be down to the appointed trustees to decide how and when these beneficiaries benefit, indeed if they should benefit at all.
This can be really useful when you consider that things can change dramatically over time and although you can leave your trustees non-binding directions on how you would like your beneficiaries to benefit from the trust, your trustees will always have the power to make the best decisions based on the circumstances at that time.
Discretionary trusts added into your Will will direct that a certain amount of the residue of your estate, or perhaps specific assets, should be transferred into trust after your death. Your Will will contain all the trust information (for example, who your trustees should be) and will act as your trust deed. Alongside your Will you should consider writing a Letter of Wishes to be left for your trustees to explain to them the reason you have created the trust and your wishes regarding who, how, why and when your beneficiaries should benefit from it. This will be invaluable to your trustees in helping them with their decision making.
The obvious consequence of writing a discretionary trust into your Will is that it will only take effect on your death and won’t exist before then. However, this does mean that you will have the ability to change your mind or make any amendments during your lifetime by changing your Will. Often, if a discretionary trust is written into a Will, this is done to look after a portion of inheritance and to make sure that there is some safeguarding after death. A discretionary trust can give real peace of mind when a testator (the person making the Will) wants certain people to be able to benefit from the trust but for whatever reason would prefer that they do not to inherit outright, or perhaps when the testator has a number of beneficiaries they are happy to benefit from their estate but would prefer decisions to be made about division after their death, depending on the circumstances at that time.
If you are fortunate enough to have surplus assets in your estate that you want to gift to your beneficiaries whilst you are still alive, you may want to look at setting up a discretionary trust during your lifetime instead.
Setting up a discretionary trust whilst you are still alive could provide you with some options which you wouldn’t have after your death. For example, you could appoint yourself as a trustee so you could be involved with the decision making and have your say with regards to any benefits from the trust.
You can also continue adding assets to the trust fund during your lifetime. This can be a useful way of gifting if you inherit or obtain future wealth, giving you the option to put this into the trust to be available to your chosen beneficiaries as and when required. This can also have the benefit of reducing your estate during your lifetime, potentially reducing the amount which could be subjected to Inheritance Tax on your death. As well as reducing your estate value, gifting assets into a trust can also take assets out of your estate and away from any potential creditors which could appear during your lifetime.
If you are considering making a gift into a discretionary trust it is always important that you seek the correct advice. Amongst other things, there could be some tax consequences to your decisions. Inheritance Tax could be payable on gifts made into trust, even during your lifetime and there could be some ongoing Income Tax and Capital Gains Tax issues to consider. It is also important to get some advice on gifting to reduce the value of your estate, in case there could be any issues relating to deliberate deprivation of assets, which could cause you or your loved one’s concern later.