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What is a Discretionary Trust?

What is a Discretionary Trust?




Natalie Biggin | Partner

A trust involves three parties. A settlor, trustee and beneficiary. A settlor is someone who creates the trust. The settlor will appoint trustees to carry out the administration of the trust. A settlor will also nominate beneficiaries who will benefit from the income and capital of trust assets.

There are many different types of trusts. The most known is a discretionary trust. A discretionary is termed ‘discretionary’ because there is a class of beneficiaries nominated and a trustee will have discretion to choose which of those beneficiaries will benefit from the trust. This may be aided by the settlor making a letter of wishes nominating primary beneficiaries. However, the premise is that no one beneficiary is absolutely entitled; it is at the trustee’s discretion.

A discretionary trust can be created in your lifetime or on death. It is used in your lifetime to take assets outside of your estate for inheritance tax purposes should you survive 7 years. Moving assets into a discretionary trust is deemed a gift from your estate.

A discretionary trust on death is used to safeguard vulnerable beneficiaries, place business assets into the trust to ease the running of the company on death or preserve assets where a beneficiary may be at risk of bankruptcy or divorce.

Any assets going into a trust during your lifetime that exceed the nil rate band (£325,000) are subject to an entry charge of 20% on the value of the above the nil rate band. In addition, there are 10 year anniversary charges and exit fees when any assets are appointed out of the trust. Finally, if the assets produce an income, trustees must submit a self-assessment tax return each year settling any income tax at the higher trustee rate.

Discretionary trusts are circumstance dependent. If you are not sure if one could benefit your situation, please contact a member of our team who can advise further. Our Wills & Probate team can be contacted by clicking here.