Discretionary Trust

A discretionary trust is a pot in which you put assets or money for the benefit of a group of people

Overview

To put it simply a discretionary trust is a pot in which you put assets or money for the benefit of a group of people and you then choose other people to manage those funds.

The people appointed are called ‘trustees’ and they become the legal owners of any assets held in the trust.

The trustees are in charge of the pot. They have complete discretion as to how, when, where and why to pay out any money to any of the named beneficiaries.

If the trust is drafted properly, they can decide not to pay out anything at all and can simply safeguard the funds for some future need or occurrence.

As a person considering creating this type of trust, you can stipulate in a letter of wishes what you ideally want to happen to the contents of the pot but ultimately it is the trustees' decision as to whether, the circumstances at the relevant time, are such, that they will follow your direction.

A discretionary trust can be created by Will and during your lifetime.

These trusts are extremely useful when:

There is a concern about a beneficiaries capability with managing money – the trustees will basically manage it for them.
The beneficiary may be getting divorced or there are concerns this may happen in the future

The beneficiary may be facing bankruptcy
When the creator of the trust is unsure how they want assets divided and want the trustees to decide based on their needs or circumstances at some future time.

The biggest downside to a discretionary trust is that it can be taxed rather heavily.

Discretionary trusts and Income Tax

The first £1,000 of trust income is taxed at 20% but the remainder is taxed at 45% (or 38.1% for dividends).

Discretionary trusts and Capital Gains Tax

Capital Gains Tax is a tax payable on profits made from the sale or gift of items such as shares and property. It is chargeable on trust gains at the rate of 20% or 28% for residential property.

Discretionary trusts and Inheritance Tax

There may be an Inheritance Tax charge when:

Assets are put into a discretionary trust – rate of 20% above the tax free limit
A discretionary trust reaches a ten-year anniversary – rate of up to 6%
Assets are distributed from a discretionary trust or the trust ceases – rate of up to 6% of the value distributed

Types of Trust

Our team are experienced in handling a broad range of Trusts, that include but aren’t limited to:

Bare Trusts

Our expert legal team is experienced in creating and managing bare trusts, ensuring that your assets are secured for years to come.

Bare Trusts
Discretionary Trusts

To put it simply a discretionary trust is a pot in which you put assets or money for the benefit of a group of people and you then choose other people to manage those funds.

Discretionary Trusts
Interest in Possession Trusts

Ensure your loved ones are cared for with an Interest in Possession Trust, expertly handled by our trusted solicitors to support your partner and secure inheritance for future generations.

Interest in Possession Trusts
Vulnerable Beneficiaries Trusts

Our London and Cambridge-based teams are committed to helping families secure the future of their vulnerable loved ones through specialised trusts.

Vulnerable Beneficiaries Trusts
Education Trusts

An education trust is a really useful way of providing for your children's futures, whilst making an immediate inheritance tax (IHT) saving.

Education Trusts
Trust Disputes

When trust disputes arise, you don't have to face them alone. The experienced solicitors in our London and Cambridge offices are here to support you through this process to find the best resolution.

Trust Disputes

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Any information on this website, whilst intended to be accurate, does not constitute legal advice.

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