The advantages of discretionary trust wills

The funds in the estate will be managed by appointed trustees who will decide which people become beneficiaries from a set list and when and how they should receive their inheritance.

Essentially, with such a discretionary trust in your will, you leave your estate (or part of it) to ‘trustees’.  There must be at least two trustees appointed and you can choose who they should be. You would then decide on a list of potential beneficiaries which can include, if you wish, charities or people who are not yet born. The trustees can use their discretion to decide which of the potential beneficiaries actually become beneficiaries. This is totally at the trustees’ discretion. 

Why would a discretionary trust will be used?

On the face of it, this is letting other people choose how your estate is being distributed, but there are circumstances where this could be appropriate. For example:

1. One of your intended beneficiaries may not be very good at handling his or her own finances and may welcome some assistance with looking after a significant amount of money.
2. A beneficiary may have matrimonial or financial problems now or in the future. Although a discretionary trust does not guarantee that funds will be disregarded in any divorce proceedings, it would provide a means to defer an actual benefit until a beneficiary is in a more secure position.
3. A beneficiary may be on means tested benefits and to receive an inheritance would just result in benefits being reduced proportionately. A discretionary trust in this situation could be useful to enable the trustees to make ad hoc payments to such a beneficiary to improve his or her quality of life.
4. You may not yet be quite sure how to deal with a distribution for minor beneficiaries. It can sometimes be difficult to determine in advance an appropriate age for a beneficiary to come into an inheritance. By use of a discretionary trust you allow your trustees to look at the circumstances after your death and decide when they think the appropriate beneficiaries are mature enough to receive money.
5. Unmarried partners (or spouses or civil partners with different domiciles) may consider using discretionary trusts to ensure that their estates do not suffer an unexpected double inheritance tax charge which may result if such individuals just leave assets to each other outright.
6. The beneficiaries may prefer not to inherit money directly because they are looking to limit the value of their own estate for inheritance tax planning purposes. In such circumstances it is common for beneficiaries to borrow funds from the trust as and when needed which can be on an interest free basis, instead of receiving a distribution.

Letter of wishes

It is of course very important if a discretionary trust will is being prepared to leave a letter of wishes alongside it. Such a letter is not legally binding, but in it you can set out how you would expect the trustees to exercise their discretion and in what circumstances to benefit your beneficiaries. The trustees can take these wishes into account but are not bound by them. They must, however, always act in the best interests of the beneficiaries.

The letter of wishes might set out, for example, at what age minor beneficiaries should receive some money, and the circumstances in which trustees may be persuaded to make distributions before then, for example, for school or college/university fees or to purchase a house or a car.

How long can such a trust last?

Legally speaking, a discretionary trust could last up to a maximum of 125 years after your death. Very commonly, however, the trustees decide in a much shorter period of time how the trust fund should be distributed. For inheritance tax reasons, trustees should consider whether there are any appointments that they make within the first two years of death as such payments are treated as if they were included in the will itself.