Last month we covered “Trusts for Disabled People Explained?” and explored when a Disabled Person’s Trust is the right Trust to consider. In this article we are going to look at a Discretionary Trust in more detail.

As a parent you continue to provide love, guidance and support throughout your child’s life to the day you die. It’s worrying for parents to think about the time when they are not there to support and provide for their child. This can be especially concerning and complicated if you are the parent/carer of a disabled or vulnerable child

Without you a vulnerable or disabled child may struggle to manage their finances, including any means tested benefits and funding they are entitled to, and may not receive the right support.  Any inheritance you leave them could result in valuable benefits and support being lost and may cause your child additional problems when dealing with the inheritance.

Trusts for disabled beneficiaries

Putting a Trust in place can give you peace of mind that the assets (property, savings or investments) you’re leaving behind to benefit your disabled or vulnerable child can be managed appropriately and can be used for their benefit throughout their lifetime.

A Trust ensures that your assets are held by trusted individuals (known as Trustees) for the benefit of a disabled or vulnerable person (known as the beneficiary or beneficiaries).

It is the Trustees who decide how to use the assets for the benefit of the beneficiaries and they are directed by a Trust document and Letter of Wishes; the guidance you provide ahead of time.

What is a Discretionary Trust?

A Discretionary Trust is one where none of the beneficiaries have the right to income and the Trustees have full discretion as to how they pay or apply income and capital for any of the beneficiaries. It’s for the Trustees to decide if, how and when the beneficiaries will benefit.

Discretionary Trusts explained

A Discretionary Trust is a very flexible type of trust as it can be used to benefit more than one person. You can include the beneficiaries you might want to benefit from the funds and this may be your disabled or vulnerable child, as well as other children, grandchildren, wider family and possibly a charity.

The beneficiaries do not have any fixed entitlement to receive money from the Trust, they only have a potential right to receive a benefit if the Trustees decide to do so. Therefore, the Trust and its assets cannot be taken into account when assessing a vulnerable or disabled child’s entitlement to means-tested benefits or Local Authority funding as they do not belong to the individual and that person has no right to benefit.

The Trustees can make decisions to meet any changing requirements of the vulnerable or disabled child and use their discretion to advance any amounts of capital or income depending on the needs of the child at different times in their life.

Discretionary Trust – taxation

Whilst a Discretionary Trust is very useful, particularly when considering multiple beneficiaries, the tax treatment is not favourable and needs to be carefully considered.

If the value of the Trust exceeds the Inheritance Tax threshold (currently £325,000) there will be an Inheritance Tax charge when the Trust is created.  There will also be an Inheritance Tax charge every ten years, which some refer to as a discretionary trust 10 year charge, and then whenever a payment is made from the Trust.  The tax rates for Income Tax and Capital Gains Tax are high.

Where a beneficiary is receiving means-tested benefits or support, the Trustees need to be careful how they use the assets. The assets should not be used in a way which endangers any future claim for means-tested benefits or support.

A Discretionary Trust can last for up to 125 years but, it is usually the case that on the death of the disabled or vulnerable child, the Trust is wound up and any assets left are paid to the other beneficiaries of the Trust.

Setting up a Discretionary Trust

Trusts made in your lifetime are known as ‘Lifetime Trusts’, that take effect immediately, whereas Trusts set out in a Will are called ‘Will Trusts’; they come into effect on the death of the person who made the Will. A Discretionary Trust can be set up under the terms of your Will, or by a Trust Deed.  There are a number of reasons why it is a good idea to set up a lifetime Trust but this will depend on your personal circumstances.

Letter of Wishes

The Trust is supported by a Letter of Wishes: your explanation to the Trustees for setting up the Trust and guidance on how the Trust fund should be used.

The Letter is separate, and does not form part of the Will or Trust document, but is kept with a Will or Trust Deed to explain your wishes and give guidance to an individual or group of people. The Letter should also outline how the assets are to be distributed to the other beneficiaries in the event of the death of the disabled or vulnerable beneficiary of the Trust. The Letter will also need to be kept under review, we suggest on an annual basis, given that your wishes and the needs of the disabled or vulnerable child will continually change.

We are here to help with any questions or queries you may have; there is a lot to consider. Please do not hesitate to contact us to discuss your specific circumstances in more detail.


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