Discretionary Will Trusts

Providing for children in your Will

Most parents tell us that ideally they would like to leave their estate to be shared equally among their children.

However, there are often circumstances when such a straightforward share may not be possible. For example:

  • One of the children has greater immediate needs than the others: that child may not have a steady income or anywhere to live.
  • There may be concerns about a child’s financial irresponsibility or marital status and so any share may be at risk of being claimed by their creditors or spouse.
  • If the parents own a business, they may not want the business to be sold in the event of their death.

In such circumstances, you may consider incorporating a discretionary trust in your will. This allows you to make provision for a group of beneficiaries and for distributions to be made from the trust to any of these beneficiaries after your death.  The group of beneficiaries need not be limited to children, it may include a spouse or civil partner, or other family members.

How does a discretionary will trust work?

A discretionary will trust is administered by trustees named in the will (usually, but not necessarily, the executors).  The trustees will usually be a spouse, children, friends or a solicitor.

The trustees are granted a range of powers including the power to make advancements of capital or income to beneficiaries.  They will be responsible for determining which of the beneficiaries benefit from the trust and how much (if anything) they should receive, and when.

Letter of wishes

You will be advised to prepare a letter of wishes addressed to the trustees. Such a letter is not legally binding (unlike a will) but it can be used to explain why the trust was set up and give the trustees guidance about how you would like them to use their powers and distribute the trust assets.

The trustees may then make decisions such as whether a beneficiary’s living costs or university fees should be paid directly as opposed to giving that beneficiary a lump sum of money. The trustees’ discretion will enable them to may make extra payments to beneficiaries in particular need or to withhold payments from a beneficiary who is going through a divorce or threatened with bankruptcy.

Tax considerations

The trustees are responsible for paying any tax due in relation to the trust.

Inheritance tax: if the value of the trust is more than the inheritance tax nil rate band (currently £325,000) there may be a charge to inheritance tax when capital is paid out of the trust to a beneficiary and on every 10 year anniversary after the testator’s death.

Income tax: tax at the higher rate tax of 45% will be payable on trust income over £1,000 (38.5% for dividend-type income). Some beneficiaries will be able to reclaim the tax paid.

Capital Gains Tax: subject to certain reliefs this will be payable at 28% if the total taxable gain is above the annual tax free allowance for trusts of £5,500.

There are administration costs associated with running a trust as the trustees will have to ensure that any investments are properly managed, that an annual tax return is filed in respect of any income producing assets and that any properties owned by the trust are maintained.

Discretionary Will Trusts can be a useful way to achieve a balance of flexibility and control when considering how best to provide for family and dependants in the light of changing circumstances.

The information in this article is provided for guidance purposes only and does not constitute personal advice. Please contact us if you would like further information.

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