Discretionary trusts explained: How they work and who they protect

Looking for a way to protect family wealth, or support vulnerable beneficiaries? You may want to consider a Discretionary Trust.

This type of flexible legal arrangement is just one of the many ways you can protect your assets and the ones you love. 

It offers a different level of asset control and beneficiary protection compared to other estate planning solutions.

At Honey Legal, we aim to make the entire Discretionary Trust setup process as simple as possible, but first, allow our estate planning experts to explain the basics.

• A quick guide to Discretionary Trust terminology
• What is a Discretionary Trust?
• How does a Discretionary Trust work?
• Who can be the Trustee of a Discretionary Trust?
• Who does a Discretionary Trust protect?
• What are the benefits of a Discretionary Trust?
• Is it easy to set up a Discretionary Trust?
• Book your free, no-obligation consultation today!

To help your understanding of what a Discretionary Trust is, how it works, and who it protects, it’s important to become familiar with the terminology.

• The ‘Settlor’: The person who creates and puts assets into a Trust
• The ‘Trustee’: The person, or people, who manage the Trust and are responsible for ensuring the settlor’s Trust deed instructions are followed
• The ‘beneficiary’: The person, or people, who benefit from the trust, receiving income, capital, or the use of Trust property
• The Trust deed: A legal document that creates the Trust, names the tTustees and beneficiaries, outlines the terms Trustees must follow, explains how the beneficiary’s assets should be managed, and includes any other Settlor instructions
• The letter of wishes: Unlike the formal contract of a Trust deed, the letter of wishes is an optional, non-binding document that acts as a flexible and informal guide from the Settlor to the Trustees. It allows the Settlor to confidentially explain how Trustees should distribute funds and why

A Discretionary Trust – also referred to as family Trust or Trust fund – is a type of flexible legal arrangement where a person or entity (the Settlor) transfers assets to a trusted group of people known as the Trustees. 

These assets can include money, investments, land, and properties.

The Trustees are then responsible for managing these assets for the class of beneficiaries. They have control over who (of the beneficiaries) receives income or capital and when.

With a Discretionary Trust, no beneficiary has the automatic right to the Trust’s assets, this is so that the assets aren’t classed as being owned by them – helping in cases where the beneficiary is vulnerable or has difficulty managing money and assets. 

A Discretionary Trust works by giving Trustees discretion over how income and capital is distributed to the beneficiaries. 

The Trustees control:

• What gets paid out (income or capital)
• Which beneficiary they make payments to
• How often payments are made
• Any conditions imposed on the beneficiaries

It works in a similar way to a Will, in that the Settlor’s wishes regarding how their assets are managed are set out – but these wishes are outlined in the Trust deed – the legal document that explains how the assets should be managed and distributed.

A Discretionary Trust can either be set up during the Settlor’s lifetime (where assets are transferred into the trust while you are alive) or within their Will, only coming into legal effect when they pass away.

The Trustee of a Discretionary Trust can be almost any competent, trusted adult with the necessary mental capacity to manage such affairs. 

A Discretionary Trust Trustee can be a:

• Family member or friend
• Professional – such as a solicitor or accountant
• Trust corporation – a corporate entity

Most Discretionary Trust arrangements require at least two individual trustees.

By preserving family wealth and shielding the assets from third-party claims, and changing circumstances, Discretionary Trusts are commonly used to protect the interests of the beneficiaries. 

These include:

• Vulnerable individuals – who cannot manage their own income or require care. The Trust can ensure they’re provided for without risking their eligibility for means-tested state benefits

• Children and grandchildren – who – due to a lack of maturity – may not spend large inheritances wisely. The Trust can keep their income and capital safe until they turn 18 (or older – depending on the settlor’s wishes)

• Beneficiaries with changing circumstances – who may be going through a divorce or separation. The Trust protects the assets from being lost through marital breakdown

• Beneficiaries with financial struggles – who may be facing challenges with debt or bankruptcy. The Trust prevents the assets from external creditors and legal judgments

• Future generations – The Trust preserves family wealth so it can benefit future generations

Asset protection

One of the biggest benefits of establishing a Discretionary Trust is that assets are protected from beneficiaries’ third-party claims and changing circumstances, such as divorce settlements, lawsuits, or bankruptcy.

Streamlined process

While there are some instances where probate isn’t required when an individual passes in the UK, Will executors are usually required to apply for a Grant of Probate before they can manage the deceased’s assets.

This typically means waiting between six to 12 months for the time-consuming process of probate to be granted. Setting up a Discretionary Trust during the settlor’s lifetime allows the trustees to bypass this waiting period, allowing them to manage and distribute assets as the trustees already have legal ownership.

Flexible arrangement

As the name suggests, the Trustees of a Discretionary Trust are afforded the discretion to manage and distribute trust assets more flexibly.

This allows them to respond to uncertain or changing circumstances – whether that’s family divorces, beneficiaries struggling with addiction, varying financial needs of vulnerable beneficiaries, or evolving tax laws. 

Full Settlor control

With a Discretionary Trust, set up during life, the Settlor has full control over how their assets will be managed, determining what the Trustees can and cannot do through the Trust deed and optional letter of wishes. 

This is particularly beneficial if – at some point in the future – the Settlor is unable to manage their financial and legal affairs themselves due to a lack of capacity, such as dementia.

Tax-efficiency advantages

The Trustee has the flexibility to distribute income in a way that minimises tax liabilities, taking advantage of lower tax rates applicable to certain beneficiaries.

Setting up a Trust can be a complex process. Whether that be a Discretionary Living Trust, or a Discretionary Will Trust.

We strongly recommend seeking expert guidance from a specialist estate planner, like Honey Legal.

Enlisting professional support with setting up a Discretionary Trust has many benefits, including:

Legal validity

Setting up a Discretionary Trust requires the creation of a legal document – the Trust deed. However, for this document to be deemed legally valid, it must also satisfy the necessary requirements, such as being properly signed and dated.

An estate planner can help the Settlor to navigate these requirements, preventing potential beneficiary, or Trustee disputes as well as costly legal proceedings.

Constant support

From selecting the most suitable Trustees to drafting legal trust deeds, specialist estate planners can play a vital role across all aspects of creating a Discretionary Trust. 

Tailored terms

Using a standard Discretionary Trust deed template can make the Settlor more vulnerable to certain risks, such as unforeseen tax charges or giving the Trustees broader powers than intended. 

A professional can ensure the terms of the Trust deed (and letter of wishes – if desired) are tailored to the Settlor’s specific circumstances and exacting wishes, helping to prevent these risks.

Professional assurance

Professional estate planners will begin the process with an initial assessment to ensure a Discretionary Trust is right for the Settlor.

This gives Settlors the confidence to move forward, safe in the knowledge that they’re pursuing an estate planning solution that’s suitable for their personal and financial goals.

Regardless of whether you require further information on Discretionary Trusts or are ready to proceed with setting up a Trust today, arranging a free, no-obligation consultation with our specialist estate planners is a great place to start.

Our supportive and friendly team will work with you to help you understand how a Discretionary Trust can help protect and manage your home in a way that benefits both yourself – as the settlor – and your loved ones.

We offer jargon-free advice and guidance that’s tailored to your specific goals, making the complex process of setting up a Discretionary Trust as straightforward as possible.

And it’s clear our customers overwhelmingly agree. With over19,000 reviews on Trustpilot, we’re proud to say we’ve earned an excellent TrustScore of 4.9 stars over the past 16 years.

To learn more about Discretionary Trusts or how to set one up in England or Wales with a helping hand from our expert estate planners, you can either:

📞 Call us on 0800 9 500 100 

📧 Email us at enquiries@honeylegal.co.uk