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Review summary

Discretionary or Flexible Trust

In a discretionary trust, the trustees have discretion about the distribution of trust assets, subject to the terms in which that discretion is granted, for example about which beneficiaries to pass it on to, how much each will get, and when they will get it.

Discretionary trusts are commonly used to keep wealth within families while allowing them flexibility to make decisions about where the assets go.

Discretionary trusts are the most flexible form of trust for providing for family and other loved ones.

Customer Reviews
Expert Verdict

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.


The Pros

> Gives trustees total discretion over the distribution of income and capital
> Total flexibility on when to pay out, to whom to make the payments, how often to make payments and if they would like to impose any conditions on the recipients

The Cons

> Subject to periodic ten-year annivesary charge & exit charges
> Gifts into the trust will be chargeable lifetime transfers (CLT)
> Does not allow the settlor any access to any of the trust funds
> Intial IHT charge of 20% on setup of a CLT over the available Nil Rate Band
Who are the trustees?

These will be outlined in the trust deed and can be either professional or non professionals appointed by the settlor. Professional trustees are able to charge fees for their services.

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Expert Assessment of a Discretionary or Flexible Trust

A Discretionary or Flexible Trust can be a useful solution, but whether it is applicable has to be determined on a case-by-case basis.

The case for using trusts in general also needs careful consideration on an individualised basis.

If you already have a trust structure in place and would like a second opinion - or, if you are wondering whether the utilisation of a trust could be of benefit in your personal circumstances contact our trust experts for comprehensive, highly qualified advice.

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