Discretionary Trusts

What Is a Discretionary Trust and How Does It Work?

A Discretionary Trust is a type of trust where trustees have the power to decide how the trust income and capital are distributed among the beneficiaries. This provides flexibility to adapt to changing circumstances and needs of the beneficiaries. Unlike Bare Trusts, beneficiaries of a Discretionary Trust do not have an automatic right to the assets; instead, they benefit at the discretion of the trustees.

Key Features of Discretionary Trusts

Flexibility in Distribution

Discretionary Trusts offer significant flexibility, allowing trustees to make decisions about who receives trust income and capital, and how much they receive. This adaptability is beneficial in responding to the varying needs of beneficiaries, making it an ideal option for long-term family wealth management.

Trustee Control

Trustees have considerable control over the management and distribution of the trust's assets. They can choose to reinvest income, pay it out to beneficiaries, or even withhold distributions if it is in the best interest of the beneficiaries. This control can help protect the assets and ensure they are used appropriately.

Tax Implications

Income Tax

The trustees are responsible for paying income tax on trust income at the trust rate, which is usually higher than individual tax rates. However, beneficiaries can reclaim tax paid on income distributed to them, subject to their personal tax circumstances.

Capital Gains Tax

Trustees are liable for Capital Gains Tax on the disposal of trust assets, but they benefit from an annual exemption, which is lower than the individual allowance. The rate of Capital Gains Tax for trusts is also higher, so careful tax planning is essential.

Inheritance Tax

Discretionary Trusts are subject to periodic Inheritance Tax charges, including an initial charge when the trust is set up and further charges every ten years. Additionally, there may be exit charges when assets are distributed to beneficiaries. These taxes can be complex, so professional advice is crucial.

Investment Flexibility

Asset Management

Discretionary Trusts allow trustees to invest in a broad range of assets, including stocks, bonds, property, and cash. This investment flexibility enables trustees to tailor the trust's portfolio to achieve the best possible growth and income for the beneficiaries.

Suitability for Various Situations

Protecting Vulnerable Beneficiaries

Discretionary Trusts are particularly useful for protecting vulnerable beneficiaries, such as minors or those with special needs. Trustees can manage and distribute assets in a way that supports the beneficiary without compromising their eligibility for state benefits or exposing them to financial risk.

Family Wealth Management

For families, Discretionary Trusts can be an effective tool for wealth management, allowing assets to be distributed according to changing family dynamics and individual needs. This makes them ideal for managing inheritances and providing for future generations.

Administrative Responsibilities

Trustee Duties

Trustees have significant responsibilities, including managing the trust's assets, maintaining accurate records, and making decisions in the best interest of the beneficiaries. This requires a high level of diligence and often professional advice to ensure compliance with legal and tax obligations.

Risks and Considerations

Complexity and Cost

Discretionary Trusts are more complex to set up and manage compared to simpler trusts like Bare Trusts. The increased administrative burden and potential tax implications mean that professional advice is often necessary, which can add to the costs.

Potential for Disputes

The discretionary nature of these trusts can sometimes lead to disputes among beneficiaries if they feel distributions are unfair. Clear communication and a well-drafted trust deed can help mitigate these risks.

Maximising Your Investment Potential with Discretionary Trusts through Continuum Wealth

Discretionary Trusts provide a flexible and robust solution for managing and distributing assets according to the beneficiaries' needs. However, the complexities involved require careful planning and professional guidance. Consulting with an independent financial adviser from Continuum Wealth ensures that your Discretionary Trust is set up and managed effectively, maximising the benefits for you and your beneficiaries.

For more information or to discuss your individual circumstances, feel free to contact us.

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Discretionary Trust FAQs

Discretionary Trusts are suitable for individuals who want to provide for multiple beneficiaries while retaining flexibility over how the assets are distributed. They are particularly useful for families with complex needs or for protecting assets over the long term.

Yes, Discretionary Trusts can have various tax implications, including:

  • Income Tax: Trust income is taxed at the trust rate, which is often higher than personal rates.
  • Capital Gains Tax: Trustees are responsible for paying capital gains tax on any gains made by the trust.
  • Inheritance Tax: There can be inheritance tax charges both when the trust is set up and periodically during the trust’s existence.

Yes, the terms of a Discretionary Trust can be changed, but it often requires the consent of the trustees and, in some cases, the beneficiaries. The flexibility of the trust depends on the terms outlined in the trust deed.

Beneficiaries of a Discretionary Trust do not have an automatic right to income or capital from the trust. Instead, they can benefit at the discretion of the trustees, who will make distributions based on the beneficiaries' needs and circumstances.

At Continuum Wealth, we offer comprehensive services to help you set up and manage Discretionary Trusts. Our team can provide guidance on the benefits and implications, assist with drafting the trust deed, and manage the investments within the trust to ensure they grow effectively. Contact us today to learn more about how we can assist you with your trust needs.

Setting up a Discretionary Trust involves:

  • Selecting trustees: Individuals or a corporate entity responsible for managing the trust.
  • Naming the beneficiaries: Those who may benefit from the trust.
  • Drafting a trust deed: This legal document outlines the terms of the trust, the trustees' powers, and the beneficiaries' potential benefits.

The primary benefits of a Discretionary Trust include:

  • Flexibility: Trustees can adapt to the changing needs and circumstances of beneficiaries.
  • Asset Protection: Trust assets can be protected from creditors or in the case of beneficiary bankruptcy.
  • Tax Planning: Potential tax advantages, depending on how the trust is structured and the distribution of income.

Trustees have several key responsibilities, including:

  • Managing the trust's assets prudently and in the best interests of the beneficiaries.
  • Making decisions about distributions to beneficiaries.
  • Maintaining accurate records and reporting to the beneficiaries as required.
  • Complying with relevant tax obligations.

A Discretionary Trust, also known as an Accumulation Trust, is a type of trust where the trustees have the discretion to decide how to distribute the trust income and capital among the beneficiaries. The trustees can choose when and how much to distribute, based on the needs and circumstances of the beneficiaries.

The main difference is the level of control and flexibility. In a Bare Trust, beneficiaries have an immediate and absolute right to the trust's assets. In a Discretionary Trust, trustees have the flexibility to decide how and when to distribute the assets, based on the beneficiaries' needs and circumstances.

A variety of assets can be placed in a Discretionary Trust, including:

  • Cash
  • Stocks and shares
  • Property
  • Other investments

Anyone can set up a Discretionary Trust. It is often used by individuals who want to provide for their family or other beneficiaries but wish to retain flexibility over how the trust assets are distributed.


Note: This page is for information purposes only and should not be considered as financial advice. Always consult an Independent Financial Adviser for personalised financial advice tailored to your individual circumstances.