What is a discretionary Will trust, and how does it work?

Making a Will can feel like a particularly demanding task, especially if your estate is difficult to quantify. However, the alternative would mean deciding it is too difficult to organise a Will and to take no action at all. To avoid passing without a Will in place, you can choose one which allows for changing circumstances to be considered, like a discretionary Will trust.

A discretionary trust is an agreement which allows you to put part, or all of, your estate into a trust. This can then be distributed to your beneficiaries by your appointed trustees when they feel it is appropriate. It’s just one example of a trust that you can set up when making a Will, and it’s an effective and flexible way of leaving assets to children and/or grandchildren or protecting family wealth for generations to come.

The people you have appointed to manage the trust are known as the trustees and can use their discretion to decide which of the potential beneficiaries actually become beneficiaries. The trustees have complete discretion, which is why they are called discretionary trusts.

Protecting your assets

Many people feel uneasy at the thought of leaving an inheritance to those who may have difficulty managing it. Thankfully, the trustees you appoint will have complete control over when to release this inheritance to your beneficiary, thus allowing you the opportunity to leave assets to people who:

  • Are unable to manage their affairs, either due to their age or mental capacity because they are not old enough or they do not have the mental capacity
  • Are receiving benefits and would lose these benefits if they inherited a lump sum of money
  • Are at risk of misusing their inheritance, due to addiction or mental illness
  • Are in a relationship with someone you feel may influence or exercise control over any inheritance they receive
  • Are generally poor with managing money or financially irresponsible
  • Are mentally or physically disabled and any inheritance could cause them a myriad of problems

In some situations, you can also request that a beneficiary’s share is only released in certain circumstances. For instance, if your one of your children suffers with addiction, you can outline that they will only receive their inheritance if they recover from this illness. If not, their share will be divided amongst your other children. This is one of the biggest advantages of a discretionary trust, as trustees can ensure the beneficiaries are looked after, but you can rest assured that the assets will not be wasted or misused.

Benefits of a discretionary trust

The principal benefit of discretionary trusts is flexibility. They are incredibly versatile, and the distribution of assets is easy. Beneficiaries can include surviving spouses, children, partners and other family members. Other advantages include:

  • You may have a beneficiary who is in receipt of means-tested benefits. Leaving assets in a discretionary trust means such a beneficiary can benefit from the trust, as and when the trustees deem this appropriate, without losing their entitlement to benefits.
  • You may have a beneficiary who cannot manage their own financial affairs. Leaving assets to them in a discretionary trust rather than outright can help circumvent the need to get a deputy appointed to manage an inheritance received.
  • It can also offer protection from creditors, meaning assets cannot be taken in the event of bankruptcy or liquidation.
  • It can provide a safer way to provide for a vulnerable client to protect them from exploitation, and can also help to manage funds for a disabled beneficiary.
  • Discretionary trusts are popular because they offer a flexible way for you to provide for your family in the event of your death.

Letter of wishes for discretionary trusts

A letter of wishes is a way for you to inform the trustees of matters to be considered when they are exercising their discretionary powers.

Typically, letters of wishes are concerned with the exercise of discretions in relation to the distribution of the trust fund. Occasionally letters of wishes may also include comments regarding the exercise of powers of investment, or of other administrative powers.

While this letter is not legally binding, trustees can take it into account when making decisions. It is also recommended that these letters are regularly reviewed with any changes in circumstance added where necessary.

life interest trust, discretionary will trust