Discretionary trusts allow a huge amount of power to your trustees, so it’s important that you know exactly where you stand when it comes to setting one up and what it means for your assets and beneficiaries.
A discretionary trust is named as such because the assets of your trust are distributed completely at the trustees’ discretion. Under a discretionary trust, beneficiaries do not have an automatic right to receive the assets held within that trust. Instead, your trustees will decide when to divide the assets and how much each beneficiary will receive.
Is a discretionary trust right for you? Seek advice from our experts
Legal implications of a discretionary trust
John Barry Wild* died in 2009. Mr Wild had set up a family trust including his £2.3M business empire in the West Midlands and a country home in Warwickshire worth more than £1M.
Mr Wild set up a discretionary family trust but tragically, his son and his widow disagreed over the distribution of the estate. Both parties were trustees together with Mr Wild’s daughter and the family accountant. The son refused to agree to his mother being paid her share of the assets within the trust.
Crucially, when trustees make a decision, they must act unanimously, it is not the case that only a majority trustees must agree. When trustees cannot agree, the matter is decided by Court. In this case. the Court ruled that Mr Wild’s son should be removed as a trustee and the widow’s money would be released to her.
Discretionary Trusts are used for a variety of reasons including the saving of tax and arrangement of the distribution of family assets. They can be created during a person’s lifetime to come into effect immediately or written into a will to come into effect after a person’s death.
Discretionary Trust vs. Legacy vs. Will Trust
In a straightforward legacy, for example, “I give my house to my wife”, it is certain and predictable that the wife will receive the house provided the husband owned it at the date of his death. This is very straightforward and a popular option for those with limited assets and a clear view of who they’d like to leave them to.
Alternatively, a Will Trust may be set up with one beneficiary during his or her lifetime with the remaining part of the Estate then passing to the children, for example, “I leave my Estate to my widow for her life and after she has died, I leave my estate to my children in equal shares”. This creates certainty for the widow but it is not as tax efficient as a Discretionary Trust.
A Discretionary Will Trust may be set up in respect of all or part of the Estate, for example: "I leave my Estate to my trustees who will divide my estate between the following persons my widow, my children, my grandchildren and further issue, any named charities or any named persons.” This provides flexibility and may provide tax savings, but it does not provide as much certainty for the beneficiaries.
The choice of trustees is crucial and you must always bear in mind that trustees need to act by unanimity and not by majority voting.
These are complicated matters. If you are considering setting up a trust and would like to discuss your options, Jackson Lees experts Wills & Trusts department can help. Call us today on 0151 282 1700, request a callback at your convenience or make an enquiry.
*Name has been changed