Why would you use it?
A common complaint we hear from members of the public is that they don’t understand the products and services they have been sold. It is important to note that we receive a large number of calls and not all are about SWW members.
One of the most common products or services fixed to an estate plan these days is a discretionary trust. In simple terms a discretionary trust is one under which the trustees (people appointed to be responsible for assets in the trust) are given a discretion to pay or apply the income or capital of the assets for the benefit of one or all of the beneficiaries. No particular beneficiary has in interest in the trust, they only have a potential interest until the trustees actually exercise their discretion in their favour.
Beneficiaries may not necessarily be a trustee and therefore may have no way of knowing whether any discretion will be exercised in their favour.
Having read this some people may still feel no clearer on what they have been sold. Understanding some of the reasons for the creation of the trust may help:
The aim of a discretionary trust is to provide flexibility. This could mean that trustees have the flexibility to adapt the money paid to beneficiaries in accordance with their changing needs etc.
Some beneficiaries may not be trusted to manage large inheritances and it may be worried that they will spend or fritter the money away. A discretionary trust may allow money to be drip fed to the person in question to preserve the fund. This will also protect the money from beneficiary’s creditors or potential bankruptcy.
Similar to above, a discretionary trust may be used to protect a beneficiary from their own improvidence. For example a beneficiary with a gambling, alcohol or drug addiction who you may not trust to inherit a large sum of money.
A discretionary trust can be used to preserve a fund for a minor until they attain an age where they can manage the money for themselves, or even to protect funds for beneficiaries beyond their age of majority.
Assets are also protected from care home fees although to create a trust with the sole purpose of avoiding paying care fees would be known as deliberate deprivation and local authorities would be right to challenge this.
They are also commonly used by those looking to drip feed money to disabled beneficiaries who would otherwise be reliant on the testator (person writing the Will).
When you consider that a lot of estate planning is done to mitigate potential tax payable on the death of the testator it can be beneficial to set up a discretionary trust.
Being that the assets are not treated as part of the beneficiaries estate there are obvious tax benefits. It is treated as a separate entity and taxed periodically. One of the greatest benefits of the discretionary trust is that under section 144 of the IHT Act 1984, any payments made by the trustees can be read back as if they were made by the testator’s Will. This means that there could be tax advantages because there is essentially 2 years further flexibility in planning.
This all sounds pretty attractive, I’m sure, but it’s important to also consider the costs.
A Will Writer advising you on the need for further estate planning such as a discretionary trust will be charging you over and above the cost of a simple Will. Presumably because your estate is no longer considered simple and additional work will be required. Using an SWW member this will be explained in your post meeting letter. When you consider that your estate planning may be helping you to save thousands (possibly tens of thousands) then their fees are often dwarfed in compassion.
Additional costs that will be expected to be paid will include any necessary costs to set up the trust on death, any disbursements whilst it’s running, as well as exit and anniversary charges.
To get further understanding on whether a discretionary trust is right for you and your estate then please speak to a member of the Society of Will Writers.