Discretionary trusts in wills pass decisions on how and when your estate is distributed to a trustee, who makes judgement calls on your behalf following your death. Lakeside Practice Principal Matthew Hibbert talks through the process as well as potential pros and cons.

What are discretionary trusts in wills?

M: A discretionary trust is when your money or assets are left in a trust following your death. Management of the trust is placed in the hands of trustees that you appointed to distribute the inheritance to your chosen beneficiaries in line with your wishes but as they see fit.

Who might they appeal to, and how do they work?

M: This type of trust often appeals to those who want some flexibility over how and when the inheritance is distributed to beneficiaries depending on their circumstances. So, for example, with a traditional will, you could stipulate that a beneficiary receives their inheritance on their 18th birthday; however, you have no way of knowing what their mental or financial state will be at that time. A discretionary trust would allow a trustee to make a judgement call at that point on your behalf, deciding what would be given to the beneficiary and when. This type of will can also help protect inheritance in the case of divorce. If the money is in trust, it could be excluded from any divorce settlement.

What are the main advantages of discretionary trusts in wills, and are there any disadvantages?

M: The top advantage is the flexibility that the trust allows, giving trustees the discretion to make decisions as they see fit, rather than on a predefined timeline. In doing so, they can help beneficiaries plan for the future and avoid the inheritance leaving the bloodline. Another advantage is that trusts provide lots of flexibility for generational financial planning where descendants can use the features of the trust to reduce tax bills and make the most of their own planning. We find we add most value when we deal with the whole family, and trust planning is a key area.

In terms of disadvantages, you must take care not to place trustee power in the wrong hands. Therefore, it’s important to choose trustees you trust eternally and who will have your beneficiaries’ best interests at heart. Sometimes, the trustees might even be the beneficiaries themselves, however, it’s important to be cautious when doing this, or it could result in them making decisions purely for their own gains.

How can Lakeside assist clients wanting to explore this type of trust in wills?

M: We would talk through the tax implications and benefits and help you select the best trustees to ensure they couldn’t abuse their position. If this type of trust is set up blindly, the money could go to the wrong people, so we would make sure the document is structured correctly.

For further information on discretionary trusts in wills, please contact: admin@lakesidefs.co.uk

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First published on January 11th, 2022

The information provided above is believed to be correct at the time of publication and is provided for information purposes only, it does not constitute advice. Any reference to interest rates or growth rates are examples only and are for illustrative purposes only. You should seek independent financial advice before making any decisions about your finances and financial products. We accept no liability for loss as a result of any action taken based on the information on this page where appropriate independent financial advice is not taken from Lakeside FS Ltd.