A general discretionary trust may suit you if you have identified a particular group of people you want to benefit but are unsure which of them, in the future, will need help or in what proportions. For example, as a grandparent you might like to set aside capital for your grandchildren – including those who may be born later, even after your death. Some of them might be more in need than others and family and financial circumstances could change from year to year.
Alternatively, you might wish to benefit your children but are aware that some of them are already wealthy and may not wish to be made wealthier by your intended gift. A discretionary trust in favour of all your children and grandchildren would allow your children the choice of taking the benefit themselves or passing it on to their own children according to their particular circumstances.
Being a beneficiary of a discretionary trust gives no entitlement to receive anything from the trust. Who receives capital advances or the income arising is entirely at the trustees’ discretion – no one has an “Interest in Possession” as described in the other types of trust. As a consequence, the death of a beneficiary has no effect on the Trust Fund because the capital of the trust is not regarded as part of the estate of the deceased person.
To be tax efficient, you, as a settlor, and your spouse must be excluded from all benefit otherwise the capital will still be regarded as yours for all tax purposes as if you have never created the trust. However, this rule does not apply if the discretionary trust is created in your Will – as you would of course be dead!
The most favourable characteristic of the Discretionary Trust is its flexibility. An English Discretionary Trust can last for up to 80 years and income can be accumulated for up to 21 years. Giving the trustees the power to introduce new beneficiaries as the need arises can enlarge even the beneficial class.
You might wish to make a lifetime settlement for the benefit of just your children and grandchildren but be worried that, if you died, your widow[er] might be in further need of capital or income; the trust funds would not then be available to help. To quell your fear you could include as a beneficiary “my widow[er]” so that when (and only when) you die, your spouse joins the beneficial class and the capital and income becomes available for his/her use if required.
Your elderly parent or other dependant could be helped with this type of trust as the subsequent death of that person would not cause inheritance tax to be paid at that time and so the trust would continue for the benefit of other class members.
Just as a discretionary trust can be created to commence in your lifetime, it can also be a feature of your Will, becoming effective only on your death. It is often used in the Will of the first of a couple to die to ensure that the Nil Rate Band is not wasted. Alternatively you might prefer that your executors decide how your estate is to be dealt with in the light of the tax and domestic circumstances existing at that time – a discretionary Will trust could achieve that.