A discretionary trust is considered the most flexible of all trusts. Our overview explains why this flexibility can be effective.
Read on to understand:
- What a discretionary trust is
- Benefits of a discretionary trust
- How discretionary trusts work
- How we can help you
- Frequently asked questions about discretionary trusts
What is a discretionary trust?
A discretionary trust allows the people appointed to manage the trust – the trustees – to decide how the assets are distributed to the people nominated to benefit from the trust – the beneficiaries.
What are the benefits of a discretionary trust?
Discretionary trusts are often used to provide for the future because they offer:
- Flexibility and continuity: trustees maintain control of a discretionary trust for its duration – unlike bare trusts that give automatic access to a child beneficiary when they turn 18
- Protection: assets inside a discretionary trust are excluded from a beneficiary’s estate and may help to protect from divorce or bankruptcy
- Savings: discretionary trusts can reduce the value of your estate and your inheritance tax bill – after seven years the value of the discretionary trust is outside your estate for inheritance tax purposes
- Efficiency: money held in a discretionary trust can be used to pay inheritance tax and probate fees on death so assets can be distributed efficiently
How do discretionary trusts work?
Step 1: choose assets
Decide which assets you’d like to hold in a discretionary trust.
Step 2: create a trust deed
When you set up a discretionary trust you start by creating a trust deed, usually with a solicitor. A trust deed is a legally binding document that sets out important criteria so trustees can manage the trust properly.
The trust deed includes detail such as the assets to be held in the discretionary trust, as well as the names of trustees and beneficiaries. For example you can say ‘grandchildren’ for beneficiaries and a discretionary trust will include grandchildren as they are born.
Step 3: appoint trustees
Trustees are a group of people appointed to manage the trust in accordance with the trust deed. You can nominate yourself to be a trustee.
Write a letter of wishes – optional
A letter of wishes helps trustees understand the personal intention behind the discretionary trust. The purpose of a letter of wishes is to guide trustees. It’s not a legally binding document.
Step 4: open a discretionary trust investment account
Once your trust deed is created and registered with HMRC’s Trust Registration Service (TRS), you can set up an investment account for your discretionary trust.
How Bestinvest can help with your discretionary trust investments
Bestinvest is the only self-directed investment platform to offer a Discretionary Trust Investment Account. You can invest with low annual fees and no fund dealing charges to help keep costs down.
We will give you a special trust form to complete when you open your Discretionary Trust Investment Account with us. Give us a call on 020 7189 2400 and we’ll help you get started.
Frequently asked questions about discretionary trusts
What do I need to know when I set up a discretionary trust?
When you set up a discretionary trust it's helpful to be aware of these key points:
- If you set up the discretionary trust you cannot benefit from the trust or unwind it back to yourself
- A tax return will need to be lodged every year to report income and gains
- If the value of the trust exceeds the nil rate band, a small inheritance tax charge may be due every ten years
What is a beneficiary?
A beneficiary is the person chosen to receive, inherit or benefit from an asset such as money, property or an item of value. set aside for them.
Who owns the assets in a discretionary trust?
Appointed trustees look after the assets on behalf of the beneficiary or beneficiaries. Assets held in a discretionary trust are not included in a beneficiary’s estate. This means assets can be protected from unexpected events such as divorce or bankruptcy, and are excluded from means testing such as a care fees assessment.
