What is a Discretionary Trust?
A Discretionary Trust is one which gives the Trustees discretion as to how beneficiaries shall benefit from the Trust. It is important to note that trustees always have discretion when it comes to every kind of Trust, what gives a discretionary trust its title is something called 'distributive discretion', allowing a trustee to decide how a beneficiary will receive assets from a Trust.
A very common way of setting up a Discretionary Trust is by putting it into your Will. This works by writing trust provisions within your Will so that when you pass away the Trust automatically creates, and your property and financial assets are scooped into the Trust and protected for your beneficiaries.
Your trustees and beneficiaries will be stipulated within the Will documents. Your trustees can then work with your beneficiaries and distribute the assets at the right time. It is important to note that the Trust formed from a Will-based Trust does not create and ultimately come into effect until death, at which point the provisions in the Trust will make the setting up of it automatic.
Usually, a Letter of Wishes will accompany a Will-based Trust. This allows you to be specific about how you wish your beneficiaries to inherit, for example, if you have young children you can specify a lump sum to go to them at certain ages, or you can request a car be bought for them when they pass their driving test.
Benefits of Including a Discretionary Trust In Your Will
Vulnerable Beneficiaries
With a normal Will, if you choose to leave a specific gift to someone, when the time comes for them to inherit, they either receive the full lump sum or refuse, there is no other option. With a discretionary Will-based Trust this is different. Appointed trustees will oversee when and how a beneficiary shall inherit, even using the inheritance to buy beneficiaries items instead of giving them the money directly, this allows you to leave gifts to people you may not have chosen in a normal Will.
Struggles with Managing Finances
You may want to leave a gift to a beneficiary who is not good at handling money and you have concern over how they would handle their finances if they were gifted their inheritance at once. With this type of Trust the trustees can look after the inheritance and decide how and when the beneficiary is gifted.
Receives Means-Tested Benefits
If any of your beneficiaries are on means tested benefits, in a normal Will inheriting may take them over the threshold for benefits and they will lose their entitlement to them. Having a Trust allows the beneficiary to keep their inheritance in the Trust and the trustees can distribute it at different times or buy things for the beneficiary so they can continue to be in receipt of benefits.
Addiction or Vulnerabilities
It may be dangerous for a beneficiary with addiction or mental health issues to receive a large sum of money all at once. With a Trust, the trustees can ensure they are cared for appropriately. You can even stipular conditions for your trustees, for example, before a beneficiary suffering with addiction issues can inherit, they must be in recovery and pass drug tests.
Undue influence
It may be the case that one your beneficiaries has a relationship with someone who will exert control or serious influence over their inheritance, by keeping such in Trust, the trustees can oversee how this beneficiary inherits and give the beneficiary a chance to have more control over their own inheritance without the influence of their relationship.
Young children
A Will-based Trust is a great way to look out for young children as you can lay out specific inheritance points or specific inheritance reasons, such as for education or to buy a house. This can give you peace of mind that your children are cared for in accordance with your wishes.
Care Costs
Care costs is a serious concern for many people. It is important to note that a Trust cannot be taken out for the sole purpose of avoiding care fees, however, it cannot be ignored that protecting assets from care costs is recognised as a benefit to having a Trust.
A Will-based trust can help with care costs in two different ways. One particular way is for couples. If one of the couple dies before the other goes into a care home their half is protected in Trust. Rather than passing directly to the remaining spouse, meaning if the surviving spouse subsequently goes into care, all assets could be used, the assets of the deceased spouse are in trust and protected.
The other way a Will-based Trust can protect against care fees is how it can protect your children and their potential care costs. It is suspected that 1 in every 2 people of this generation will go into a care home after the age of 65. If you have a Will-based Trust then your children’s inheritance is protected in that Trust, which prevents it being taken to pay for their own care costs.
Disinheriting
In Scotland, the law is unique in that it protects certain categories of people when it comes to inheriting. Spouses, civil partners and children all have a legal claim on the estate of their spouse, civil partner or parent. These claims are almost impossible to defeat and the only real way you can protect against disinheriting is taking out a Trust
Once the assets go into the Trust they are no longer technically seen as your property and instead viewed as an asset of the Trust, therefore, it will not be counted when it comes to any claim by a disinherited party.
Revocable and amendable as time goes on
Another advantage of a Will-based Trust is that it can be amended throughout the years as many times as you wish. The Trust does not create until death which means you can change it as your life changes by simply updating/amending your Will.
Adding Beneficiaries
A Will-based Trust allows you to account for beneficiaries who are not yet born because your trustees have the power and discretion to add beneficiaries. This is common practice when you have grandchildren and you may not have included some before you pass away or some are born thereafter, the trustees can use their discretion to make provisions for them.
More affordable
A Will-based Trust is a lot cheaper than setting up a full comprehensive Trust which is usually known as a Family Protection Trust. Although a Will-based Trust does not offer all of the same or same level of protections and benefits as the FPT, it offers a wide range for cheaper and may offer exactly what you need at a more affordable price.
COMMON MISCONCEPTION: MY BENEFICIARIES HAVE NO SAY
A common misconception with these kind of Trusts is that your trustees hold all the power and your beneficiaries have no say, this is not the case. Trustees usually work with beneficiaries to help them work out what is best for them. Beneficiaries who have the capacity and are able to make the best decisions from themselves, usually work with the trustees to take their inheritance as and when they need it. This is why it is common practice to appoint a professional trustee, they will take precautions to look after your vulnerable beneficiaries per your wishes and lead by the instruction of other beneficiaries who are more able to make the best decisions for themselves.
Should I Set Up a Will-based Trust?
When considering setting up a Will-based Trust, the most important thing to consider is your beneficiaries; A Will-based Trust allows your beneficiaries to inherit when it is right for them; it allows them to hold their inheritance in a place where it is protected and it allows you to give the power to trusted people to care for your vulnerable beneficiaries when you are no longer there to do so. Life changes and sometimes these change are unpredictable, discretion allows you to plan for your own circumstances and those you cannot foresee by giving more choice and protection over your assets for your beneficiaries.
How to Set Up a Will-based Trust?
Setting up a Will-based Trust is very simple. We would book you in for an appointment with one of our advisors, this can be a house visit, in office appointment or telephone call and we have consultants who can come out all over the UK. They will spend the time getting to know you and understanding your circumstances so they can help advise what would work best for you.