Discretionary Trust

If you’re considering setting up a flexible trust that keeps your assets secure, while helping to avoid paying potentially large sums in inheritance tax, then a discretionary trust might be the right choice for you.

What is a Discretionary Trust?

A Discretionary Trust is a legal agreement, allowing an individual (known as a Settlor) to set up a trust that contains assets or money. This trust is looked after by a group of people, or “trustees”, on behalf of a group of people, known as the “beneficiaries”.

Why Might You Choose a Discretionary Trust?

A discretionary trust gives the trustees greater control over the distribution of the trust assets than found in other trusts. Trustees can decide:

How much income or capital is paid out.
Which beneficiaries to make payments to.
When payments are made.

This allows for greater flexibility, and assets can be better protected if circumstances change.

It is strongly advised that those setting up a trust write a detailed letter, giving guidance to the trustees on how to make decisions according to their wishes. These instructions are known as a “Letter of Wishes”.

Who Can You Choose as a Beneficiary?

You can choose any number of people, to be a beneficiary of your trust. These could be:

Any named person or persons.
Groups of people, such as “my children, grandchildren, and any future grandchildren”.
A charity, or multiple charities.

Due to the flexible nature of the trust and its beneficiaries, you can even leave assets to unspecified beneficiaries, such as future descendants who haven’t been born yet. This means your Letter of Wishes will need to be future-proof, but it can be rewritten or amended to take account of changing circumstances.

What are the benefits of a discretionary trust?

Asset management: Trustees can oversee and manage the assets on behalf of the beneficiaries, ensuring that funds are used wisely and appropriately.
Asset protection: Trustees can effectively manage assets for those who can’t manage the money themselves, such as children, or those with illnesses or disabilities that affect capacity or decision-making.
Safeguarding against divorce: If a beneficiary is going through a divorce, any assets held in a discretionary trust may have more protection from being part of the divorce settlement.
Shielding against bankruptcy: If a beneficiary faces bankruptcy, the trust can help protect the assets from being claimed by creditors.
Flexible asset distribution: When the creator of the trust is unsure how they want assets divided, trustees can decide for them. You can still give guidance for trustees to follow, in a set of instructions known as a Letter of Wishes

Who Can You Choose as a Beneficiary?

There are two notable things to consider with discretionary trusts:

It can be taxed rather heavily, as it is taxed at multiple stages: When assets go into the trust, after they remain in the trust for a ten-year period, and when they are distributed to the beneficiaries - although it is worth noting, that this may still amount to less tax paid, than the flat 40% tax paid in Inheritance Tax.
Unless you are also a trustee, you are relinquishing control of the assets to the assigned trustees. That is why it’s essential your trust and assets are managed by experienced trustees, like our team at Culver Law who have extensive experience in managing trusts and their assets.

Taxation of Discretionary Trusts

How discretionary trusts are taxed can be complicated. We’ve broken them down in a simple way below, but our Culver Law team are happy to explain further:

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).

Capital Gains Tax Applies When

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 24%.

Inheritance Tax Applies When

When assets are put into a discretionary trust, they are taxed at a rate of 20% above the tax-free limit (currently £325,000): This rises to 40% if the Settlor dies within seven years of the assets being placed into the discretionary trust.

A discretionary trust reaches a tenth anniversary – rate of up to 6% over the Nil Rate Band.

Assets are distributed from a discretionary trust or the trust ceases – at a rate of up to 6% of the value distributed.

When Should I Set up a Discretionary Trust?

A discretionary trust can be set up at any time, or it can be set in your Will to come into effect after your death. However, if the Settlor dies within 7 years of setting up the discretionary trusts, there may be further tax to pay: Meaning it can be advisable to set up discretionary trusts in advance if possible.

Additionally, any lifetime gift that exceeds the inheritance tax threshold of £325,000 will be taxed at 20%, on any inheritance that is over that £325,000 threshold (but not the amount within the £325,000).

If the amount which you leave in your discretionary trust will exceed this threshold, there are other tax relief options that you can take, that we would be happy to advise you on.

How We Can Help You Set Up a Discretionary Trust

Our team of experienced solicitors at both our London and Cambridge offices, are experts in discretionary trusts, and therefore provide friendly, comprehensive support for establishing trusts and managing them according to your wishes.

Trust Creation and Management: Culver Law drafts legally sound trusts tailored to your needs, following your Letter of Wishes while maximising benefits for the beneficiaries.
Expert Legal Advice: With extensive experience in trust law and trust management, we guide you through the legal and tax complexities of setting up discretionary trusts.
Protection of Beneficiaries: We safeguard trust assets, ensuring the benefits to your beneficiaries are maximised.

Why Choose Culver Law to Look After Your Trust?

Here at Culver Law, we’re experts at handling discretionary trusts in the best interests of the Settlor.

Individually Tailored Trusts: No two clients we work with have the same goals or circumstances - that’s why we offer trust solutions that are individually tailored to you and your situation.
Service That Puts You First: Our approach to legal services is rooted in putting our clients first. When you make us trustees of your trust, you can be safe in the knowledge that our focus is doing what's best for you and your beneficiaries.
Compassionate Approach: Trust and estate planning can involve sensitive and complicated decisions about family, finances, and the future. Our team of experienced legal experts offers an understanding approach, ensuring your concerns and wishes are heard and respected.
Experts in Trust Law: Our legal team holds years of experience in navigating trust law. We stay up-to-date with the latest legal developments and make sure your trust complies with any new regulations.

Michael Culver

Michael is a Court of Protection panel deputy for property and affairs. He is responsible for managing the money and assets of people unable to manage such matters for themselves. Michael has also acted as a health and welfare deputy for a number of clients, making decisions over matters where they are unable to make decisions for themselves. Michael’s expertise in Statutory Wills, including a vast knowledge of Will writing and experience working with the Court of Protection, is a valuable asset to solving your Statutory Will queries.

Contact:

Tel: 0207 846 5029
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FAQs

What is a Letter of Wishes for Discretionary Trusts?

A Letter of Wishes is a detailed letter that gives guidance to the trustees on how to make decisions regarding the assets within the trust, and their distribution. The Letter of Wishes can also be updated by the Settlor if their wishes change, for example, if there is a change in circumstance of one or beneficiaries.

It is worth noting that this is not a legally binding document, and the trustees have the power to deviate from your instructions if they consider it in the best interests of the trust.

Can Discretionary Trusts Help with Inheritance Tax?

In short, yes. Discretionary trusts are a great, tax-efficient solution when it comes to passing on your wealth to your beneficiaries. However, the way they are taxed is more complicated than the Inheritance Tax, and it is strongly advised to work with trustees who you trust to manage the trust in your best interests.

Additionally, discretionary trusts must be planned for in advance due to the seven-year rule.

For support and guidance on how to establish a tax-efficient method for protecting, managing, or distributing your estate, contact our team today.

What is the Seven-Year Rule?

If the person who gives a gift into the trust, or the person who set up the trust, passes away within seven years, the value of the gift into the trust is included as part of the deceased's estate for Inheritance Tax purposes.

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