Discretionary Trusts: Keeping it in Family

When thinking about providing for the next generation, making a Will should be at the top of your list and should be put in place as soon as possible. Laura Colville, Associate Solicitor at our Chichester Office considers the best ways to protect or ensure control of your assets once you passed away.

You are likely to have your desired beneficiaries in mind but what are your views on passing your estate to them with “no strings attached”? For many, this will be the preferred option and it means that, after you have died, your beneficiaries are free to do what they like with their inheritance.

They can save it, spend it or give it to charity if they choose. Once these assets transfer to the beneficiary it will be their own Will that says what is to happen to that money next, in the event of their death.

Gain Control with a Trust

If you have any reservations about how assets are passed to others in the event of your death, then options are available for you to exert more control over what happens.

By using a type of Trust within your Will, you can keep assets within your own chosen class of beneficiaries, even after you die. The Trust is called a Discretionary Trust and typically would name family members (e.g. children and grandchildren and further descendants) as the potential beneficiaries.

The term “Bloodline” Wills has recently been appearing in publications and this catchy term is what some are using to describe Wills that incorporate Discretionary Trusts.

The Trust could then be called upon to make distributions to one or more of your family members as and when they may need the money. You would have Trustees appointed who would be responsible for making distributions and you should consider leaving a detailed letter of wishes for your Trustees to follow so that they know what your intentions are in respect of the Trust.

Understand the Implications

Is there a down side to having a Discretionary Trust in your Will? In some cases, adult children may have an expectation of inheriting from their parents outright and, therefore, to find that there is a Trust involved can be disappointing.

The purpose of the Trust is protection. If a child goes through a divorce or bankruptcy then the money in the Discretionary Trust is not included in the calculations for settlement.

It also means that, upon a child’s death, the Trust money stays within your family and does not pass to that child’s husband or potentially to someone else’s grandchildren (e.g. if your own child had married someone who had children already).

They are not suitable for everyone and it should be noted that, once a distribution is made to a beneficiary, the money is then theirs to do with as they please.

In the same way as if the money had been left to them directly, in the event of their death, any money from the Trust distributed to them would pass in accordance with his/ her own Will.

More Financial Flexibility

Another useful reason for using a Discretionary Trust is if your chosen beneficiary is likely to be in receipt of means-tested benefits in the future. A large inheritance can mean that these benefits are stopped and once the inheritance runs low, your beneficiary would have to go through the process of claiming them once again.

The other time when using a Discretionary Trust is highly advantageous is when you own business assets or shares. There is an Inheritance Tax Allowance called Business Relief (previously Business Property Relief) which can be up to 100% of the business assets, depending on certain criteria being satisfied.

By placing the business assets or shares into a Discretionary Trust set up in your Will, your Executors and Trustees would then have maximum flexibility to decide on the future of the business and to make use of the Inheritance Tax allowances, taking the appropriate advice and then, in most cases, distributing the business assets or shares before the expiry of two years after death.

Trusts can be Complex – Get the Best Advice

With lots of options out there, some find it confusing to choose the correct professional to engage to put in place your Will and some people are tempted by the DIY route.

I cannot stress strongly enough the importance of using a professional Solicitor specialising in Wills (often called a Private Client Solicitor). They would be able to provide you with all of the relevant advice in respect of your Will, any Inheritance Tax considerations and your options when it comes to Trusts.

A bespoke service is required when making a Will to ensure that what you have is correct for you in your circumstances.

Anderson Rowntree Solicitors has many years experience in handling and advising on Wills and Trusts – whether creating a new Trust, acting as trustee or administering your trust.  We advise both trustees and beneficiaries and we can review and advise you in respect of your existing trust.

Laura Colville is an Associate Solicitor based in our Chichester Office and advises on all aspects of Wills, Probate, Trusts & Tax Planning and Estate Administration. She is a fully accredited member of Solicitors for the Elderly and also a Dementia Friend.

For more information, contact Laura on 01243 787899 or email ljc@andersonrowntree.co.uk