Things to consider before setting up a discretionary trust

If you already have, or are considering, a discretionary trust within your will, it is vital that you understand the impact of this. Do the potential disadvantages outweigh the benefits of what you are trying to achieve by including such a trust?

Tax-planning tool?

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. 

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

What’s the right solution for you?

So the first step really ought to be this: think carefully about what you are trying to achieve and 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.

For example, it is not unusual for someone to visit an advisor because they are thinking about inheritance tax planning, only to find that, once they have been advised of the thresholds, they in fact are covered by the nil-rate band (taking into account transfers from spouses and the residence nil-rate band).  

There are other trusts that may be more appropriate, such as trusts for disabled or vulnerable people, 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. 

Further considerations

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, they can be extremely effective in reaching a your objectives (provided used with ‘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, your first port of call would be to talk to a qualified advisor

Pippa Bavington TEP is an Associate Solicitor at Giles Wilson LLP in Leigh on Sea in Essex, UK

Disclaimer

An article of this kind can never provide a complete guide to the law in these areas, which may be subject to change from time to time. The opinions and suggestions made within this article should not be interpreted as specific advice in relation to any particular individual or individuals. Neither STEP, the article author or their firm accept responsibility for any loss occasioned by someone acting or refraining to act on the basis of the opinions and suggestions contained in this article. More