Discretionary Trusts – Management of Personal Assets

Discretionary trusts are a useful way of passing assets out of an estate for the benefit of others, but in a way that allows the funds to be used flexibly, to cater for the individual needs and circumstances of the beneficiaries.

The trustees of a discretionary trust enjoy a wide range of powers with regard to the accumulation, investment, and distribution of its income and capital. In effect, what is done with the trust assets, provided it complies with the provisions of the trust deed, is left to their discretion.

The beneficiaries can be chosen from a wide class and can include not only the settlor’s children and grandchildren but also their future spouses. Although they are afforded some legal protection, the beneficiaries cannot compel the trustees to make payments to them and do not have rights over any of the trust income or capital.

Capital Gains Tax and Inheritance Tax

Trustees pay tax on income received and capital gains realised by the trust at the rate applicable to trusts and beneficiaries pay tax on the income received from the trust fund. Trustees are liable to pay capital gains tax at the rate applicable to trusts above an annual exemption. Inheritance Tax is not payable on the death of a beneficiary of the trust. Passing assets into a discretionary trust is a chargeable transfer for inheritance tax.

Tax, in the form of a 'periodic charge', must be paid on the property in the trust fund every ten years. Tax is also payable if the trust is dissolved or if there is a disposition of the property which diminishes the value of the trust.

Why consider a discretionary trust?

Its main advantage is that the fund’s assets may be passed from one generation to another without the payment of inheritance tax. Its flexibility also allows the trustees to react to circumstances within the family and to market conditions, and protects family assets from the financial difficulties and indiscretions of beneficiaries. However it is vital to obtain legal advice as the powers afforded the trustees are wide. We can advise you on tax planning and financial matters.