In a Discretionary Trust, the trustees have the discretion over whether to pay out the income to any beneficiary or to accumulate it in the trust and add it to the capital.
Here are some of the key features:
- Trustees usually have a discretion as to which member of a class of beneficiaries is to benefit.
- A beneficiary under a Discretionary Trust cannot claim any of the trust property as of right. He /she only has a hope that the trustees will exercise the discretion in his /her favour.
- This is the most flexible type of trust. The decision as to beneficial entitlement can be deferred and does not have to be determined at the time the trusts are created.
Reasons for using a Discretionary Trust:
- It enables you to provide for a number of beneficiaries, giving the trustees scope to deal with the trust assets in the light of the beneficiaries’ circumstances and tax law.
- You can oversee the initial running of the trust and ensure that arrangements are running smoothly.
- It allows you to provide for beneficiaries without giving them rights to either income or capital (this is useful if you have high risk beneficiaries who may not handle the funds responsibly or wisely).
- Your beneficiaries will not lose their entitlement to means-tested state benefits.
- It can help you to provide an income for your children and grandchildren in circumstances where the income and capital are protected.
- Trustees have the discretion to give to beneficiaries in light of the circumstances at the time.
Life Interest /Interest In Possession Trusts
An Interest In Possession Trust is one that gives an automatic and immediate right to the income from the trust as it arises.
- A present right to the present enjoyment of income.
- The trustees have to pay the annual trust income to a beneficiary.
- The beneficiary is usually called the Life Tenant.
- The Life Tenant may be given an interest for life or for a number of years, or the interest may be determinable by an earlier event such as remarriage or cohabitation.
- The beneficiary with an interest in remainder is often called the Capital Beneficiary.
- The Life Tenant and the Capital Beneficiary can be the same person such as where the settlor wishes to stagger the beneficiary’s entitlement.
Reasons for using this type of trust:
- It’s useful if you don’t want your trustees to control the allocation of the trust fund among the beneficiaries.
- It prevents problems for the trustees in the event that there are strained relationships between the beneficiaries.
- It can provide income for your adult children whilst shielding the capital from their divorce or financial indiscretions.
- You can use it to provide a home for your partner whilst keeping the property intact to pass on to your children from a previous relationship.
Other Types of Trust
Whilst Discretionary Trusts and Life Interest Trusts are the two main types of trust, there are other types which we can provide depending on your circumstances:
Spendthrift Trust: This is a kind of discretionary trust, which enables you to give income whilst also protecting the income and capital. It can protect beneficiaries who are not financially responsible such as gamblers or people who are alcohol or drug dependant.
Disabled Trust: Use this to protect any disability benefits that the beneficiary is receiving.Pension and Life Policy Trusts: These can allow your spouse to enjoy the proceeds of your pension or life policy whilst ensuring these policies do not form part of your estate, and therefore protecting them from Inheritance Tax.
Pilot Trust: This is useful for will planning and tax planning. Use it to achieve inheritance tax mitigation for legacies in a will.