Soul of Discretion
Posted on 4th May 2023 at 11:00
A Trust is a way of managing assets (money, investments, land or buildings) for people. There are different types of Trusts and they are taxed differently.
Trusts are set up for many reasons, including:
● to control and protect family assets
● when someone’s too young to handle their affairs
● when someone cannot handle their affairs because they’re incapacitated
● to pass on assets while you’re still alive
● to pass on assets when you die (a ‘Will Trust’)
There are three roles involved in Trusts:
● the ‘settlor’ - the person who puts assets into a Trust and decides how they should be used
● the ‘Trustee’ - the person who manages the Trust on a day-to-day basis and pays any tax due, and deals with the assets according to the settlor’s wishes
● the ‘beneficiary’ - the person/people who benefit from the Trust
There are many different types of Trust, and in this blog, we’re going to take a closer look at Discretionary Trusts.
What is a Discretionary Trust?
A Discretionary Trust is set up to provide a flexible solution to meet the needs of its beneficiaries. It enables the Trustees to distribute the Trust's income or capital among eligible beneficiaries, and grants the Trustees the authority to invest the Trust’s capital, buy or sell assets, and make loans to beneficiaries.
Trustees can choose the type of payment (income or capital), who should receive payments, the frequency of those payments, and any necessary conditions for the beneficiaries. These conditions can be guided by a Letter of Wishes from the settlor, however, ultimately, the Trustees you choose will decide when and to whom the assets are distributed.
What do you mean by “conditions” for the beneficiaries?
You may not know exactly how you want your estate to be divided up amongst your beneficiaries. For example, you may wish to make provisions to pay for private education for future grandchildren out of the Trust, or perhaps one of your intended beneficiaries is an addict and you want them to have completed a stay in a rehab facility before they can inherit. A Discretionary Trust would allow you to effectively ‘defer’ their rights to the assets until the trustees feel that it's appropriate.
Why might you need a Discretionary Trust?
In the previous blog, we talked about Gary, Nancy and Stella. Nancy, Gary’s first wife, passed away, leaving Gary with her family inheritance and their three now-adult children.
Gary later married his second wife, Stella. After five happy years together, Gary died peacefully in his sleep.
Gary had updated his will so that everything was left directly to Stella, meaning that wife number 2 not only inherited all of Gary’s money, but she also inherited the money that Nancy had left to Gary. And Stella’s will states that she wants to leave everything to her own children, leaving nothing for Gary & Nancy’s kids.
That’s quite a sticky situation. However, this could have been avoided had Gary placed his assets from Nancy and his own assets that he wanted to pass on to his children into a Discretionary Trust. By making a Discretionary Trust, Gary could have passed the decision of how and when the Trust would be distributed over to the Trustees, who would have ensured that Gary’s estate was distributed according to his wishes, rather than exclusively left for Stella to apportion as she saw fit.
Discretionary Trusts aren’t just used to protect assets in the event of a new marriage or partnership. This kind of Trust may be established to provide for a future need, such as for a grandchild who might require more assistance than the other beneficiaries, or for those who may be incapable of managing the money themselves.
Trustees can also stagger the inheritance for each beneficiary, to ensure that their needs are taken into consideration. Beneficiaries could receive regular payments from the Trust, rather than one lump sum which could be at risk of mismanagement. This makes sure that the money is used to secure their well-being and not to indulge in any temporary luxury they desire.
Another benefit of appointing Trustees is that they are impartial and are required to make decisions without bias. This allows beneficiaries to be certain that any decision they make is based on the facts at hand and not motivated by anything else. Ultimately, it can be a more secure and practical way to look after someone’s financial future, and the settlor can rest assured that the assets will not be squandered.
Trusts can be invaluable resources in the right circumstances. Hopefully, our blog has helped shed some light on this important topic.
If you’re unsure about any of the matters raised here, then please do call - 01234 713021 - or drop me an email at email@example.com. I’d be delighted to help.
Tagged as: Soul of Discretion
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