The trust deed requires the trustees to distribute the income and capital at the trustees' discretion as to one or more of timing, amounts and beneficiary, and/or the trust income to be accumulated within the trust.
Normally the settlor and their spouse are excluded under the terms of the trust to avoid the trust income being taxed on the settlor, which creates flexibility when settling funds on trust for IHT planning purposes.
Discretionary trusts are popular in IHT planning as the lifetime nil rate band, currently £325,000, can be settled on trust without a lifetime IHT charge.
Also, assets that qualify for 100% business or agricultural property relief can be settled on trust in most situations without a lifetime IHT charge.
Provided the settlor has not retained an interest under the terms of the trust, the property settled will not be treated as being included in his estate.
Because discretionary trusts offer so much flexibility, they continue to be a useful tool in estate planning.
Another use for discretionary trusts is where minors, (individuals under age 18), are among the beneficiaries of the trust, because the trust income can be left to accumulate for so long as the children are too young to receive the money.
Once the children are older, trust income can be distributed to them or used for their benefit, for example to pay for their education.
Care must be taken when parents set up trusts for minor children however, as in many cases the income will become taxable on the parents.