What Is A Discretionary Trust?

A discretionary trust gives trustees the power to decide how much beneficiaries receive from a trust and when. All capital and income are distributed entirely at their discretion. This means there is more flexibility, and assets can be protected if circumstances change.

Advantages include:

• Trustees can pay out distributions according to the beneficiaries’ needs and in the proportions they deem appropriate.
• Assets are not owned by the beneficiaries, which allows them to be passed down to future generations.
• They can be used to seek inheritance tax relief for assets such as businesses and agricultural property.

Disadvantages include:

• Trustees have total control over who receives distributions, which allows them to ignore the testator’s wishes if used in estate planning.
• Beneficiaries may feel aggrieved by the terms of the trust which can result in claims against the testator’s estate.
• They are expensive to establish and administer due to ongoing fees for professional advisors, tax, and out-of-pocket expenses incurred by the trustees.
• If the estate is taxable, the residence nil rate band will be lost and considerably more inheritance tax will be payable unless the trustees take appropriate advice regarding appointing the property out of the trust within two years from the date of death.

More information is available in the By Lawyers Trusts guide.