Introduction
A Discretionary Trust does not decide in advance who gets what. You name a group of people who could benefit, you appoint trustees you trust, and you leave them the judgement to decide how much each person receives and when.
That sounds vague until you consider how much can change in twenty years. Marriages, illnesses, businesses, addictions, house prices and grandchildren nobody had thought of. A Discretionary Trust is the arrangement that copes with all of it.
How a Discretionary Trust Works
You transfer assets to trustees, either during your lifetime or through your will, and you set out a class of beneficiaries. That class is usually drawn widely: your children, their children, and sometimes future descendants and their spouses.
No beneficiary has a fixed right to anything. They have a hope of benefiting, and the trustees decide whether to pay out income, advance capital or wait. That absence of entitlement is not a technicality; it is the whole point, and it underpins most of the protection the trust gives.
Trustees must act in good faith and in the interests of the beneficiaries as a whole. They keep records, they consider each beneficiary's position and they can be held to account. Within those duties, the judgement is genuinely theirs.
Flexibility When Circumstances Change
Fixed shares in a will fossilise the position at the moment you signed it. If one child later inherits from elsewhere, another develops a serious illness and a third turns out to need very little, an equal split may be the least fair answer available.
Trustees of a Discretionary Trust can respond to the family as it actually is. They can help with a deposit for the child who cannot get on the property ladder, fund care for the one who becomes ill, and hold back the share of someone going through a divorce until it is safe to pay it.
They can also stage payments rather than handing over a large sum at once, which for a young adult is often the difference between a foundation and a squandered windfall.
Vulnerable and Unpredictable Beneficiaries
Some beneficiaries should not receive money directly. That may be because of a disability, a mental health condition, an addiction, a gambling problem, a difficult relationship or simply youth.
Because nobody in a Discretionary Trust owns a share, the funds are not there to be lost, claimed by a creditor or counted in a means-tested assessment as the beneficiary's own capital. Trustees can meet needs directly, paying for accommodation, equipment, courses or care rather than transferring cash.
Where the beneficiary is a disabled person, a specialist arrangement may fit better and can attract different tax treatment. Our Vulnerable Persons Trusts page explains that route, and we will tell you which of the two suits your family before anything is drafted.
Receiving an Inheritance Into Trust
Discretionary Trusts are not only for what you leave. They are also useful when money is coming to you.
An inheritance received outright becomes your capital, which can reduce means-tested support, add to your own estate for inheritance tax and be exposed to a future divorce or bankruptcy. Depending on the circumstances and how quickly you act, it may be possible to redirect the inheritance into a discretionary trust instead, sometimes by a deed of variation agreed with the others affected.
The protection is only available while the position is still open, so timing is everything. If an inheritance is on its way to you, speak to us before it lands.
The Letter of Wishes
Giving trustees discretion is only comfortable if they know what you would have wanted. That is the job of the letter of wishes, which sits alongside the trust and guides them.
A good letter is specific and human. It might say that education comes first, that one child has already been helped with a deposit, that another needs steady support rather than lump sums, or that the family home should not be sold while a particular person lives there.
It is not legally binding, which is deliberate, because binding instructions would remove the very flexibility you set out to create. You can rewrite it whenever life moves on, without touching the trust deed itself, and we help you keep it up to date.
Points to Weigh Up
Discretionary Trusts have their own rules and running costs, and we would rather you heard that from us at the outset:
- Trustees have real responsibilities, including record keeping, accounts and registration where required.
- Discretionary trusts have their own tax treatment, which can include entry, ten year and exit charges depending on value.
- Income within the trust is taxed under trust rules rather than the beneficiary's own rates.
- Choosing trustees who will still be willing and able in twenty years matters enormously.
- For a straightforward estate passing to capable adults, a simple will may serve you better, and we will say so.
Where a matter needs legal representation, we work with a local solicitor and are able to cover any and all of your requirements.
Call us on 0800 048 7320 for a free, straight talking conversation about whether a Discretionary Trust fits your family.
Frequently Asked Questions
What is a Discretionary Trust?
What is a letter of wishes?
Working alongside a local solicitor
We work with a local solicitor and are able to cover any and all of your requirements. If in doubt, call us on 0800 048 7320 and ask, or use the contact form on our home page.
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We will explain how a Discretionary Trust works and whether your family needs one.
