What are Discretionary Trusts?
With these types of Trust provisions, you leave your Estate – or part of it – in Trust, deciding who the potential beneficiaries will be when you die. This could include those who are not yet born, for example, grandchildren or great-grandchildren who you think may come along, but haven’t yet.
With this type of Trust, in your Will you would appoint Trustees, who would be responsible for managing and implementing the terms of the Trust. The Trustees would be able to use their discretion to decide which of the potential Beneficiaries, or the people who eventually become Beneficiaries, receive funds or assets from the Trust. Not all of the potential Beneficiaries will ever receive anything, as the decision is completely made at the discretion of the Trustees.
We would usually prepare a letter of wishes, which stipulates how you would like the Trustees to apply the funds of the Trust.
Benefits of a Discretionary Trust
One reason that a Discretionary Trust may be an option in your Will could be if you intend to see how events in the future pan out before deciding who you would want to receive what, so you want the flexibility to change your letter of wishes in the future. Although, this would be on the understanding that the Trustees do not have to follow your wishes, if they did not want to. Alternatively, you may feel that one of your problem is not good at managing money, for example, if they have a problem with alcohol or drugs, and you may therefore decide that you do not wish to leave them a large amount of money to ‘blow’ in one go. Therefore, the Trustees would be able to use their discretion to decide when or if that person received any money.
Another use for this type of Trust would be if the person who you wish to leave money to are in receipt of means-tested benefits or cannot manage their own affairs due to being a minor or mentally incapable.
This type of Trust allows the Trustees to manage the money on behalf of the potential Beneficiaries.
Example of a Discretionary Trust
Mr Smith, a farmer, wishes to allow his three children to receive his farm and business when he dies. However, he only wants the child or children who end up following the same career path to receive this. Unfortunately, his children are all very young and he is concerned that leaving it to all three of them equally could lead to disagreement in the future.
He approaches his local solicitors for Wills to discuss the issue, and they propose placing the farm and business into a discretionary trust. Mr Smith should prepare, or instruct his solicitors to prepare on his behalf, a letter of wishes, outlining what he would like the Trustees to do with the assets. He can then update this letter throughout his life, as the circumstances change.