A Discretionary Trust leaves funds to a group of potential beneficiaries, rather than a specific beneficiary. The Trustees then decide who from that group of beneficiaries receives what at any one time.
Why use a Discretionary Trust?
A Discretionary Trust can be used as a vehicle to protect assets for the next generation, mitigate inheritance tax, protect a bankrupt beneficiary, protect a vulnerable beneficiary, or protect a beneficiary undergoing a divorce.
Directing the decision-making of Trustees
When the Trustees decide how to distribute income and capital from the Trust Fund, they can be guided by your wishes, as set out in a letter. This letter should state what issues the Trustees should have in mind when deciding how to make the distributions.
For example, if it were inappropriate for a certain beneficiary to receive their share of the Trust Fund outright, the Trustees could retain their share in the Trust Fund, distributing it at a more appropriate time, such as when their divorce has finalised, or when they have reached a certain age.
Beneficiaries have no automatic right
Ultimately, it is up to the Trustees of a Discretionary Trust to decide how they are going to distribute the funds in that Trust to the potential beneficiaries.
The beneficiaries simply have a hope of benefiting and not a right. Therefore, it is more difficult for the Revenue, a Trustee in Bankruptcy, a Divorce Court or the Benefits Agency to look at any part of that Trust and claim that it belongs to a particular beneficiary and therefore that should be treated as their asset.
If you are interested in discussing Discretionary Trusts in more detail, please do not hesitate to contact us for Free First Legal Advice.