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What is a Discretionary Trust?
This is one of the main types of ‘proper’ trust sitting alongside the Interest in Possession (‘IIP”). Note, it is considered that a bare trust is not a ‘proper’ trust and is more akin to a simple nominee arrangement.
As with any trust, the Settlor(s) will transfer (settle) assets on to the trust to be held by the Trustees. The Trustees will manage and apply those assets for the benefit of the beneficiaries. The Settlor is usually an individual but can be an employer who establishes the trust for the benefit of their employees.
What makes a Discretionary Trust special is that the Trustees have significant discretion over whether they make income or capital distributions to beneficiaries and, if so, to which ones and the level of any distribution.
An individual can either create a Discretionary Trust in their lifetime or by will.
How is a Discretionary Trust established?
As stated above, an individual can create a discretionary trust either:
|When created?||How established?|
|Lifetime||A trust deed will need to be signed by the Settlor and the Trustees.
Following the signing of the deed, the assets are held, or should be transferred into, the Trustee’s names.
|By will||The relevant assets are held on trust on the death of the Settlor.
The will should state the terms on which the assets are held on trust (effectively acting as the trust deed).
Again, assets are held, or should be transferred into, the Trustee’s names.
Letter of wishes
In most cases, the Settlor will prepare a Letter of Wishes for the Trustees.
This will set out how the Settlor wishes for the Discretionary Trust to be operated. It should be noted that this letter is not legally binding.
Why consider using a Discretionary Trust?
A Discretionary Trust has many uses. These include, but not limited to:
Who can act as Trustee?
In reality, anyone can be a Trustee – including the Settlor and the beneficiary (indeed, all of these ‘positions’ could be filled by the same person).
Often, a professional person is appointed as a Trustees and this will often be a Company. This is generally a good idea as the obligations placed on a Trustee should not be undertaken lightly.
It should be noted that some individuals subject to bankruptcy or a conflict of interest (eg a single potential beneficiary) may not be so suitable.
Who are the beneficiaries?
It is up to the Settlor to decide who he or she wants to benefit from the trust.
Under a discretionary trust, these can be specifically named individuals or classes of persons.
However, the potential beneficiaries have no right, merely a hope, to benefit from the trust assets.
The nature of a discretionary trust is that the Trustees have significant discretionary powers. Until the trustees decide to exercise these powers the funds, then the funds will remain within the trust.
In order to be a discretionary trust here must be a minimum of two beneficiaries.
If you have any queries surrounding discretionary trusts, or the use of trusts in general, then please get in touch.
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