• February 28, 2024
 Common Questions in SWW Inbox: Discretionary Trusts

Common Questions in SWW Inbox: Discretionary Trusts

Welcome to the next instalment in a new series of articles from the SWW Technical Team; Common Questions in our Inbox. This instalment will be about one of the most common will trusts – discretionary trusts.

A discretionary trust is a type of trust where the trustees are given complete discretion to pay or apply the income or capital of the assets that are in the trust, for the benefit of one or all of the beneficiaries. They have control over how much to distribute at any given time, when to make distributions and who to make them to.

Can you have one beneficiary in a discretionary trust?

Due to the discretionary nature of the trust, there needs to be more than one discretionary beneficiary. There can also be a class of people that are appointed as the discretionary beneficiaries i.e. children or grandchildren. Charities can also be a named discretionary beneficiary.

Can the beneficiary of a discretionary trust also be a trustee?

Yes, they can. Where the beneficiary is also a trustee, we would advise one other trustee is appointed who is completely neutral to avoid any conflict of interest.

What is the benefit of this type of trust?

Placing the assets in a discretionary trust protects a beneficiary’s share where they are financially unstable. Some may not be trusted to look after a large inheritance and there may be a worry that the money will be spent at once. This type of trust allows trustees to manage the trust fund to prevent this from happening whilst providing the financial assistance as and when it is required.

It can also be useful where a beneficiary has a drink, drug or gambling problem and there are worries that gifting the inheritance outright would worsen their addiction.

This could also be used to preserve funds for a minor until they reach an age where they can manage the money for themselves.

Some beneficiaries may have already reached the IHT threshold and do not want the inheritance they are to receive to increase the size of their own estate. In this situation, the trustees could simply lend the money to the beneficiary.

A further use of this type of trust is that it can safeguard money from a beneficiary who is currently going through or likely to go through a divorce as the funds are treated as belonging to the trust.  However, specialist advice should be taken if this is the intention as the trust would require careful management.

Can a property go into a discretionary trust?

Yes, it can.

Can the RNRB still apply if a share of a property goes into a discretionary trust?

Where a main residence passes to a discretionary trust, the RNRB will not apply.

However, the RNRB could be recovered if the property is appointed out to direct descendants within 2 years of the testator’s date of death – section 144 of the Inheritance Act 1984.

Can the beneficiaries make a request for funds?

Yes, they can. However, the trustees are required to act in the best interest of the trust and therefore they can refuse this request. Essentially the trustees have absolute discretion with the funds.

Can the testator request that the trust funds are used for a certain purpose?

The trustees have complete discretion over the trust funds and are required to always act in the best interests of the trust.

If the testator does have wishes for how they would like the funds to be used i.e., university fees, deposit for a house etc, it is advisable for the testator to write a letter of wishes accompanying the Will which provides some guidance to the trustees in how they would like the assets to be distributed.

A letter of wishes is not a legally binding document and therefore there is no obligation placed on the trustees to follow them.

Do the assets in the trust form part of the beneficiary’s estate for IHT purposes?

No, it does not. Any assets that are within the discretionary trust belong to the trust only.  Although the assets aren’t subject to IHT in the beneficiaries’ estates, it is important to add that the trust may be subject to relevant property regime charges.

Can loans be made from the trust to beneficiaries?

Yes, it can be if the trustees agree to this. Any loan from the trust to a beneficiary should be documented properly and by way of a loan agreement.

I am worried about money being given from the trust to the beneficiary directly, can it be used to benefit in other ways?

If there are concerns about the money being given to the beneficiary directly, the trustees can assist in other ways. For example, they can issue food vouchers to the beneficiary which will ensure it can only be spent on certain items. If the beneficiary lives in rental accommodation, for example, they can arrange to pay the landlord directly.

Will the discretionary beneficiaries be treated fairly?

No particular beneficiary has an interest in the trust or an entitlement to the trust funds – they only have a potential interest until the trustees actually exercise their discretion in their favour.

Have a question of your own for the SWW Technical Team? Send it to us at technicals@willwriters.com and where possible, we’ll advise.

The Society of Will Writers

https://www.willwriters.com/

The Society of Will Writers (SWW) is a non-profit making self-regulatory organisation that seeks to protect the public and serve the interests of those who are active professionals in the Will Writing and Estate Planning field, as well as the upkeep of advancement, education, and ethical standards within the profession. Founded in 1994, the SWW has grown to a membership of over 1700 estate planning professionals across the UK, Europe and further afield in places such as Asia and Africa, each championing our standards and enabling the public access to high-quality Will Writing and Estate Planning services.

The main goals of the SWW are:

  • To promote to the public at large the real need and sense in having a valid will.
  • To act as a self-regulatory body by vetting practitioners through stringent membership requirements, proficiency standards and ongoing training.
The SWW is proud to be one of the frontrunning organisations where steering the profession is concerned, regularly meeting with other regulators and industry stakeholders to ensure that our members voices are heard, and needs are matched. Being a member of the SWW also grants access to exclusive benefits such as unlimited technical support when you’re in need of help, bespoke PII cover available only to SWW members, a web listing through the Find a Member section on our website, and discounts on both our and selected partner’s products and services. SWW Members also have access to regional groups, ongoing training, and an annual conference, all designed to enhance their knowledge and create excellent networking opportunities.

The designatory letters of the SWW’s membership grades:

  • SWW (Affiliate)
  • MSWW (Full)
  • ASWW (Associate)
  • FSWW (Fellow)
  • SWW (Companion)
  • SWW (Honorary)
Each membership grade denotes its holders experience and is an assurance to the public that the Will Writer or Estate Planner that they are engaging with is trained, insured and SWW code compliant. We always encourage members of the public to ask their Will Writer if they are a Member of the SWW, and any Member would be happy to present their membership ID card as proof. The public can also rely on checking any Member’s credentials by contacting SWW head office.

Meet Sam Smith – Head of Membership

Sam manages the membership team here at the SWW. He is responsible largely for Member recruitment and handling enquiries from Members. As well as liaising with Society partners and third parties, he also looks after our 20 regional chairs. Sam is always on hand at SWW events to meet and greet. In Sam’s downtime, he enjoys going to the gym, restoring his camper van, and playing golf. Sam is the point of contact between the SWW and Todays Wills & Probate. If you have any enquiries, you can contact Sam by emailing him at sam.s@willwriters.com or calling the office on 01522 687 888 and he would be more than happy to assist.