Do you want to provide in your Will for a beneficiary who is vulnerable in some way, and would not be able to manage the funds themselves? This might be because they are disabled, have an addiction problem or are a spendthrift. It may also be relevant to someone in a shaky marriage, where you would not want their inheritance to be taken into account on an eventual divorce. For whatever reason, you feel concerned about the person’s financial future and are keen to leave them something in your Will, but are very conscious that it would not be sensible to leave funds to them outright at this stage. Fortunately, the law provides an excellent solution known as a ‘discretionary trust’, which allows your chosen trustees to retain control over the funds and ensure that your beneficiary can be safely and carefully provided for, in a controlled manner.
Set up a Discretionary Will Trust
You would establish a discretionary trust in your Will, for the benefit of your vulnerable beneficiary, along with other beneficiaries for whom you may wish to provide. It is essential that you have several beneficiaries, in order that the trust would be viewed as truly ‘discretionary’ in nature. You would appoint trustees, who would be in charge of running the trust for you after your death. You would leave a letter of wishes, explaining to your trustees how you envisage them using the funds in the trust for the benefit of your beneficiaries. The letter of wishes is non-binding, but will act as useful guidance to your trustees.
In due course, on your death funds would pass into the discretionary trust and your trustees would run the trust and make decisions about advancing income and/or capital to your beneficiaries. That would allow them to keep the situation under review, and if for example they felt that the main beneficiary had turned a corner in future and would now be able to handle their inheritance themselves, they would have the option of winding up the trust and advancing the capital to them. Alternatively, if that was not the case, the trustees could keep the assets in trust long-term, and could advance small amounts as required depending on the needs of your beneficiary. If the situation was such that in future, your trustees felt that there would never be any prospect of advancing capital to the vulnerable beneficiary, or perhaps if they died, the trustees would be able to advance the capital to your other beneficiaries instead and wind up the trust.
Crucially, a discretionary trust is an extremely flexible vehicle which will allow you to provide for your vulnerable beneficiary, and your trustees to adapt to future changes in circumstances.
How is a Discretionary Trust Taxed?
There is an additional inheritance tax cost involved in running a discretionary trust, instead of allowing your beneficiary to inherit outright. The trust will be subject to a ’10 yearly charge’ at up to 6% of the value of the trust fund, and an exit charge when assets leave the trust. However, you may well take the view that this is worthwhile in exchange for the asset protection benefits of keeping the assets safely in trust for your vulnerable beneficiary long-term.