Talking About Discretionary Trusts and Myths

Surely everyone loves discretion: the flexibility, the freedom, the adaptability - great!  Or maybe not: the uncertainty, confusion, and possible cause for dispute, hmm....

If you already have, or are considering a discretionary Trust within your Will*, it is vital that you understand the impact of this, and whether any potential disadvantages outweigh the benefits of what you are trying to achieve by including such a Trust.

Discretionary Trusts are often “advertised” as a tax-planning tool or an asset-protection mechanism. I am not saying that they cannot potentially be these things, but it certainly is not a “one size fits all” arrangement. 

The tax-planning aspect is a slight “hangover” from pre- 9 October 2007 (the date from which the nil rate band could be transferred between spouses) and so not necessarily applicable any more. 

The specific family and personal circumstances need to be considered, as does the health and life expectancy of the parties involved. Not to forget asset and liability values, and therefore possible tax considerations. 

So the first step really ought to be this: think carefully about what you are trying to achieve or why you think you may need a Discretionary Trust?

Then get proper advice from someone suitably qualified (this may be an accountant and / or a lawyer) about whether your concerns are even valid. By way of simple example, it is not unusual that a client comes to me for Inheritance Tax planning, only to find that, once I have advised of the thresholds, they in fact are covered by the nil rate band (taking into account transfers from spouses and the residence NRB).  

There are other Trusts which may be more appropriate, such as Trusts for disabled or vulnerable, or a lifetime interest Trust. Maybe, there is another route entirely such as granting a right to occupy, conditional gift or an expression of wishes. 

If the conclusion is that a Discretionary Trust IS an appropriate choice, then be sure to fully understand how it works, think carefully about who your Trustees will be (effectively the “managers”) and ensure that you have been advised about the administration obligations, including tax returns (note that tax returns may be required even where there is no actual tax liability). 

Trusts are a relatively unique feature to English law, and not straightforward, but as long as someone is there to guide through these legal “devices”, Trusts can be extremely effective in reaching a client's objectives (provided used with a 'full instructions manual' and handled with proper care!).   

So if you have an existing Trust and do not understand why, or are considering setting one up, our Private Client department at Giles Wilson would be happy to assist (even if just to clear up any Discretionary Trust “myths”). 

*Lifetime Trusts can also be set up, but that is again a separate matter.