Trusts

First, what is a Trust?

Every time an asset is transferred into the name of one or more people ('Trustees') to hold for the benefit of others, a Trust has been created. Usually it is believed that the persons who are to benefit ('beneficiaries') are not (or are not yet) in a position to look after their own assets.

Trusts can be (and, indeed, often are) set up in Wills.

What is a Discretionary Trust?

People with a portfolio of assets will sometimes wish to put some of it into Trust. The Trusts they set up will often be used to benefit their families. Usually they wish to specify:

  • Who is to benefit
  • What the share of each beneficiary is to be
But sometimes it is thought best to be a bit more vague! The plan is then to 'see how things turn out' - to give the Trustee of the Trust the right to make the final choice - perhaps to do so in twenty years time. There is to be an element of discretion. For this reason what they have done is set up a 'Discretionary Trust'.

What does a Discretionary Trust achieve?

It prevents any particular beneficiary having the right to demand any or all of the Trust assets. This is to be decided by the Trustees

When is a Discretionary Trust appropriate?

A typical case: grandparents want the Trustees to see how the family will turn out, - or whether any of them have special needs.

One of the ways in which better-off people can reduce the family's commitment to Inheritance Tax is by making a lifetime gift. Such a gift into a family Discretionary Trust can be a useful vehicle for intelligent giving. The older generation can divest themselves of chargeable assets and at the same time keep a measure of control. There is no reason why the grandparent/parent setting up the Trust should not be a Trustee but (and this is an important 'but') he must exclude himself from even possible personal benefit.

We also use Discretionary Trusts for some other financial-planning objectives

Are there snags?

Yes, we fear so!

For Inheritance Tax purposes a gift into a Trust (like other such gifts) is fully effective only after seven years (with some advantage gained after three years).

Some expense is involved in setting up a Discretionary Trust.

There is likely to be some annual expense in running the Trust. (So we would not ordinarily suggest such a Trust unless its assets were likely to be, or to grow to, five figure sums.)

The Trust bears its own Income Tax and Capital Gains Tax at a rate higher than that of a standard rate taxpayer (but lower than a higher rate taxpayer). There are special rules regarding Capital Gains Tax.

Can such a Trust be used for giving to Charities?

Yes: with considerable tax efficiency. However if your primary purpose is charitable giving we would advise that a separate Trust should be set up (and itself registered as a Charity). In other words family beneficiaries should not also be included. You might wish to set up the:

"Albert Jones Family Trust"
and the
"Albert Jones Charitable Trust"

Any final thoughts?

This area of the law is not altogether straightforward. If anything we have suggested appeals to you, do come and talk it through with us. We shall be pleased to help.