Making a Will can be a daunting task, especially when you are trying to plan for a number of different scenarios – none of us can predict the future. Not being able to decide how you would want your estate to be distributed does not have to be an excuse to delay making a Will altogether. Including a Discretionary Trust in your Will may allow you to account for changing circumstances.
How does a Discretionary Trust Work?
A Discretionary Trust in a Will creates a class of potential beneficiaries for the Trust. The Beneficiaries do not have a right to anything; they merely have a hope of benefitting. The trustees have complete discretion over how to apply the capital and income of the Trust. They can choose to benefit any one or more of the potential beneficiaries as they see fit. The class of beneficiaries can be very wide. This allows the trustees to consider the following when deciding when and how the Trust fund is divided:
- The nature of the assets in the estate;
- The value of the assets in the estate;
- The tax regime; and
- The personal circumstances of potential beneficiaries.
One of the benefits of having a Discretionary Trust in place is that your beneficiaries do not automatically inherit the Trust assets on your death. The Trust assets (whilst they remain in the Trust) should therefore not be taken into account for an individual’s Inheritance Tax position or for example for care home fees, means tested benefits, or divorce or bankruptcy proceedings. It also gives an opportunity to “even up” any lifetime gifts made to beneficiaries.
What options do my Trustees have?
Your trustees have two years following your death to decide whether they wish to formally set up the Discretionary Trust in your Will. It is important for your trustees to consider the tax treatment of setting up the Discretionary Trust as this can be quite complex depending on the assets involved. The Trust will also require ongoing administration. The trustees will need to submit Income Tax returns in respect of any Trust income and ensure that any additional tax charges (e.g., anniversary charges and exit charges) are calculated correctly, and paid to HMRC within the relevant timeframes. It is therefore always prudent to instruct a professional to assist with the ongoing Trust administration. We at Moore Barlow have a team of experts who can assist you with this.
If your trustees decide that they do not wish to formally set up the Discretionary Trust in your Will, they can take advantage of writing-back provisions in the two years following your death and appoint out (pay out) out of the Trust. Once they have decided on who these payments are to be made to, and in which proportions, these will be treated for Inheritance Tax Purposes as though they were gifts made by you on your death. These provisions can be particularly useful for tax and succession planning, as your trustees can take account of all surrounding circumstances during that two-year period as well as any guidance left by you in a Letter of Wishes.
How will my trustees carry out my wishes?
The key to ensuring that your trustees can carry out your wishes is to leave a detailed Letter of Wishes to guide your trustees as to how they should exercise their discretion. This letter is not legally binding therefore your trustees could choose not to act in accordance with the Letter of Wishes. It is, therefore, important that you choose trustees whom you Trust and believe will act as you would have wanted but who are also able to react sensibly to changing circumstances. Your Letter of Wishes may be changed at any time in the future without having to go to the expense of changing your Will and should be reviewed every three to five years or if there is a significant change in your personal circumstances (eg. birth, death, divorce).
How Moore Barlow solicitors can help
Your trustees can be potential beneficiaries, but it is a good idea to include at least one trustee who does not have a financial interest in the Trust and can therefore act impartially. This can be a professional such as a solicitor or accountant and is something that our private wealth team at Moore Barlow are extremely experienced in doing.
