A guide to setting up a discretionary trust in the UK

Ready to protect and manage your assets with a Discretionary Trust?

This trust is a flexible legal arrangement, providing trustees with full control to decide which beneficiaries receive income or capital and when – which can make it complex to set up.

Our step-by-step guide explains setting up a Discretionary Trust for yourself in plain English, guiding you through the process with ease.

First, however, allow our estate planning experts to explain the crucial difference between a Discretionary Trust and Discretionary Living Trust.

While the two terms are sometimes used synonymously, there’s an important distinction to be made between Discretionary Trusts and Discretionary Living Trusts. 

A ‘Discretionary Trust’ simply refers to a type of Trust where the Trustees have discretion over which beneficiaries receive money or assets as well as how and when they receive them. 

A ‘Discretionary Living Trust’, however, specifically refers to a Discretionary Trust that has been created during the Settlor’s (the person who creates and puts assets into a Trust) lifetime.

This distinction is important because Discretionary Trusts can also be established through a Will, meaning it only comes into effect after death.

For this reason, this article explains how to set up a Discretionary Living Trust.

To setup a Discretionary Trust while you’re still alive (also known as a Discretionary Living Trust) in the UK, the Settlor must:

• Speak to an estate planning specialist

While discussing your Discretionary Living Trust needs with a legal practitioner isn’t a mandatory requirement to kickstart the setup process, we always recommend speaking to a specialist estate planner first.

The team at Honey Legal can help you to understand the complex world of estate planning without all the legal jargon, ensuring you receive clear, expert advice.

Depending on your specific needs and goals, they can also help you to explore alternative trust options that may be more suitable for you, such as Interest in Possession Trusts whether living or via a Will. 

• Define the goals of the Trust

This second step is usually best discussed with an estate planning specialist. They can help you to pinpoint exactly why you’ve decided to set up the Trust, identifying any significant personal, family or generational goals.

• Identify the Trust’s beneficiaries

With the goals of the Trust in mind, the Settlor must identify potential beneficiaries.

It’s common for Settlors to make their children and further generations beneficiaries of Discretionary Living Trusts. 

Discretionary Living Trust beneficiaries often include:

• Children and grandchildren
• Future unborn family descendants
• Extended relatives, such as siblings, cousins, and in-laws
• Vulnerable or dependant family

• Appoint Discretionary Living Trust Trustees

Once you’ve decided who will benefit from the Trust, you need to determine who will manage the assets and make future distribution choices – known as the Trustees. 

For a Discretionary Living Trust, you must choose at least two.

It’s common for Settlors to be Trustees on a Discretionary Living Trust, as well as selecting trusted family members or friends to their trustees.

The key here being that you appoint people who you implicitly trust to carry out this function, as it may be problematic having to remove them when things go wrong. 

• Draft the Trust deed

Next, the Trust deed (the formal legal document that creates the Trust, identifies the Trustees and beneficiaries, and defines how the Trust should be managed) must be drafted.

This is usually done with a qualified legal professional to help prevent mistakes, disputes, and non-compliance with tax rules. While it’s not a legal requirement to draft the deed with support from an estate planning specialist, it’s strongly recommended.

Their invaluable experience, qualifications, and expertise can ensure that this legally binding document is clear, valid, and worded correctly.

• Write a letter of wishes

A letter of wishes – a non-binding document that acts as a flexible and informal guide from the Settlor to the Trustees – is not a strict legal requirement for setting up a Discretionary Living Trust in the UK. 

Whilst not a strict legal requirement, this separate note to the Trustees can provide both useful instructions into how they should distribute the assets as well as insight into the personal reasoning behind the Settlor’s decisions.

• Sign the Trust deed

Next, the Trust deed must be signed, witnessed, and then dated by the appropriate persons in the correct order. This document must be signed by:

• The settlor
• All appointed Trustees 
• Signature witnesses (must be adult, independent witnesses who cannot be party to the Trust, a beneficiary, or a spouse of a signer)

• Transfer assets into the Trust

Once the Trust deed has been signed by all the required parties, the Settlor can begin to transfer legal ownership of their assets (typically a property) from themselves, into the legal title of the appointed Trustees, to hold on trust.

To ensure tax and legal compliance when moving assets, for example a property, into the Trust, the Settlor will need to update the title of the property, with the Trustees’ names in place of their own. This will clarify that the assets are held on trust. 

• Register Trust with the HMRC

Finally, the Trust must be registered via the UK Trust Registration Service, which is overseen and managed by HM Revenue and Customs (HMRC).

This registration process will allow the Trustees to carry out their administrative obligations and ensure full compliance with anti-money laundering regulations.

After the Trust has been officially registered, the lead Trustee will receive the trust’s UTR (Unique Taxpayer Reference) if it’s a taxable Trust or a Unique Reference Number (URN) if it’s a non-taxable Trust.

Our team makes the complex process of setting up a Discretionary Living Trust as straightforward as possible. 

As estate planning specialists, Honey Legal is well-positioned to provide jargon-free advice and expert discretionary trust guidance tailored to your specific goals. 

Regardless of exactly how you wish you to protect and manage your assets using trust-based legal arrangement, our friendly and knowledgeable advisors will take the time to understand your needs.

Don’t just take out word for it. Why not take a look at the thousands of positive, 5-star Trustpilot reviews Honey Legal has earned?

To find out more about how we can support you with setting up a discretionary trust in the UK or to schedule your free, no-obligation initial consultation in the comfort of your own home, we’d love to hear from you.

You can get in touch by:

📞 Calling us on 0800 9 500 100

📧 Emailing us at enquiries@honeylegal.co.uk  

Disclaimer

Nothing on our site constitutes advice on which you should rely. It is provided for general information purposes only. Professional or specialist advice should always be sought before taking any action relating to Estate Planning, taxation and its implications and the effect of any actions.