What is a Discretionary trust?
A Discretionary Trust is a type of Trust where there are a group of beneficiaries. The beneficiaries can either be specifically named or can be referred to by description such as ‘children’ or ‘spouse’.
The beneficiaries have the potential to benefit from the Trust at any time during the lifetime of the Trust. This is normally 125 years as this is the maximum that the trust is allowed to last in Law. The trust can be brought to and end much earlier than this by simply distributing the entire fund between the beneficiaries.
How much and when any beneficiary receives any money is decided by the Trustees. This is why it is called a Discretionary Trust; the Trustees have the discretion to decide who gets what and when. The Trustees do not have to divide the fund equally between the beneficiaries and indeed if they feel that it is appropriate then they could give all of the funds to only one beneficiary.
Discretionary trusts have several significant advantages.
1. The assets that are placed in the trust can still be accessible to the surviving spouse if they need any of the money.
2. The children and grandchildren can also be given money from the trust at the Trustees discretion.
3. Any money placed into trust does not belong to the surviving spouse so can not be taken by:
- a new spouse if they remarry
- the local Authority if they have to go into a nursing home
- the Trustee in Bankruptcy if the surviving spouse goes bankrupt
4. Any money placed into trust does not belong to the children so can not be taken by: - their spouse if they get divorced - the Trustee in Bankruptcy if they go bankrupt
5. The trust can be used to meet the school or university fees of any grandchildren and no income tax will be paid on any money so used.
6. The trust will last for 125 years and so your children can also pass the assets on inheritance tax free to their children, potentially saving thousands of pounds in taxes that might otherwise be payable.
In order to make the most use of a trust we recommend that a discretionary trust is set up in first death and the maximum inheritance tax free amount placed into it (£325,000 in 2011/12). If the first person to die has a larger estate than this then any excess can pass to the surviving spouse tax free. Then when the second person dies a second discretionary trust should also be created with the same amount of money. Ultimately there will be two trusts running each with up to the inheritance tax free allowance within them, and these will each continue until all the funds have been paid out.
