Discretionary Trust

Discretionary trusts are popular because they are very flexible allowing the trustees wide powers. That flexibility enables the trustees to use the trust assets to meet the individual needs of a beneficiary more easily and match any changing circumstances that arise. For example, they don’t have to release money every year from the trust if it's not needed.

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Often called a hope trust as the trustees of a discretionary trust have absolute power to decide which of the beneficiaries are going to receive a benefit from the trust. In other words, none of the beneficiaries has a fixed entitlement to anything from the trust, they only have a potential right to receive something. So if the trustees' don't feel the beneficiaries need it then they can refuse to give them anything.

A real positive to discretionary trusts are that they can avoid negatively affecting entitlement to means-tested benefits. For example if a disabled person is named as a beneficiary of a discretionary trust the trust assets won’t be taken into account when the person is being assessed for means-tested benefits or local authority care funding.

A possible negative to discretionary trusts is that depending on the value of the trust there may be an inheritance tax charge:

  • When you place the assets in the trust

  • When you transfer any assets out of the trust

  • On its ten year anniversary

Also there is additional penalty of having to pay a very high rate of income tax should you go over your Nil Rate Band tax allowance (NRB) plus this is not a trust you would want to protect funds in if your estate needs to take advantage of the Residential Nil Rate Band (RNRB) allowance.