What is a Discretionary Trust?

Looking to save for you children? A trust can be a very useful way of helping to provide for a child or children. One of the most popular trusts is a discretionary trust which offers a great degree of flexibility and is a particularly good way to help disabled or vulnerable beneficiaries. Read on to find out all about discretionary trusts.

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Discretionary Trust Will – How it Works

When a discretionary trust is set up, the settler (usually a parent or grandparent) may give a property or money and appoint one or more trustees to administer the proceeds of the trust. Trustees have absolute discretion (hence the name) in how they hand out the benefits of the trust. In many circumstances the beneficiaries are not liable for any tax.

Fixed Trust Discretionary Trust

A fixed trust is set in stone and the beneficiaries and what they will receive is all decided when it is set up. This is sometimes the choice of parents who have a disabled child and is a good way to ensure that they receive the care they will need after the parents have died.

A discretionary trust is much more flexible as it allows for changes in circumstances and this is why it is so useful for parents who are uncertain about how situations may change in the future.

Whichever type of trust the appointer chooses, it is essential to get the correct legal advice about how the administering the trust. More importantly, you should get legal advice as to who will be the trustees. Anyone who is old enough to own a property may act as a trustee. It is usual to appoint someone who is independent of the family. This ensures that a court would not consider the trust to be a sham with the settler having control over their own funds. If there is more than one trustee then everyone appointed must agree before they administer any property or funds.

The Trustee

Some trustees receive payment for their services and they specify this when the trust is set up. Additionally, trustees must ensure that proper records are kept about what has taken place. A trustee can not delegate decisions to someone other than another trustee; Even this they can only do when the deed of trust allows. Trustees must try their best to act prudently on behalf of the beneficiaries. However, they are not liable to any losses that are incurred e.g. unexpected falling stock prices.

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How You Can Use a Discretionary Trust

When a discretionary trust is set up, it is often as part of the wishes from a Will. In most cases there will be a letter from the settler setting out their wishes. This could be to establish whether the funds are divided equally between all the beneficiaries and at what age this should be done. It may also be set up as a way to pay for education costs. The trustees will be able to disperse funds on an annual basis to pay for private school fees or university tuition fees. The trust may also specify that a child has to reach a certain age before they get any funds from the trust. This can also be older than the age of 18.

Many young adults do not handle the financial world responsibly at first, often taking out quick short term loans and buying expensive items without thinking about how they will pay for it. Often, parents or grandparents want to be sure that the child is mature enough to deal responsibly with the benefits of a trust fund. This is when trustees can make some discretionary decisions about how they administer the funds. Some trusts are subject to Capital Acquisitions Tax. However, if the trustees use the funds for the child’s support, education or maintenance when both parents have died then the trust may be exempt from CAT.

Discretionary Trust For a Disabled Child

A discretionary trust is particularly helpful for parents who have a child with a disability. Making extra provision for a child with a disability or handicap usually is a top priority for a parent. Setting up a discretionary trust is a good way to ensure that the child receives funds that will assist with care and day to day living costs. The options for state care are diminishing. Therefore, a discretionary trust can help parents to pay for caregivers and to meet the future needs of a disabled child.

A discretionary trust is flexible enough to allow for some major changes in the needs of a child. In some instances the child can be appointed as one of the trustees so that they can have some input in the decisions about administering the funds. There can be some CAT liability with this kind of discretionary trust. However, if the beneficiaries need the funds for certain kinds of medical expenses the tax will not apply.

A discretionary trust can help a disabled child with future care. - Cashfloat

Discretionary Trust Fund For an Adult Child

Setting up a discretionary trust for an adult child who has some lifestyle problems can be a good way to provide care without risking the whole of the funds by simply giving the money to the child. For example, a child who has some problems with a drug habit or an alcohol addiction may need some assistance. However, a properly administered trust will ensure that the fund is managed in a sensible way and that they will not drain all the benefits in a reckless fashion. In this kind of situation, there may be some tax to pay but sometimes a case can be made for exemption if the beneficiary is unable to manage their affairs as in the case of someone suffering from an alcohol addiction. In this type of case there is some discretion about tax relief.

Advantages and Disadvantages of a Discretionary Trust
Advantages	Disadvantages
Asset protection. Assets which are held by the trust are not owned by the trustees or beneficiaries. The creditors of the trustees or beneficiaries can have no claimi against the trust. Holding property in a trust may allow for passing down wealth t o further generations. Flexibility. As per the appointer, the trustees have the flexibilty to adapt distributions according the the needs of the beneficiaries. Inheritance tax. Having assests in a discretionary trust can limit taxation on inheritance. In many cases the beneficiaries will not have to pay tax.	Loss of control. You are giving a broad discretion to the trustee and therefore assets are places outside of your control. However, you still keep the right to manage the trust assets which prevents the trustee from taking any unwanted action. Expenses. This is not a cheap way of protecting your assets. The trustee may have to pay for legal, accounting and investment advice.

Other Ways a Discretionary Trust Can Be Helpful

Setting up a discretionary trust can also be a helpful way to protect your assets from creditors. This is especially useful if your family assets are at risk due to professional reasons or because you have given a guarantee for someone else’s loan. However, you cannot set up a trust merely to profit from recent bad decision making and the trust must have been set up at least two years before or the funds can be claimed by under the Insolvency Act. Additionally, a trust fund that has been established before you die means that members of your family are unable to make a claim on your estate as the trust will have been established purely for the benefit of those you have chosen.

Conclusion

As we have seen, there are many benefits to setting up a discretionary trust, and as long as you choose the trustees carefully you can be sure that your wishes will be carried out. However, remember that a trustee has absolute power over the trust and it is always possible that they will make decisions which you would not approve. The best way to avoid this is to appoint more than one trustee. This will ensure that all decisions are approved by them all.