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What is a discretionary trust?
Discretionary trust wills provide a way to leave assets or money to beneficiaries indirectly.
This may be tax efficient, which means it will help you to pay less tax on the value of your assets.
Discretionary trust wills are known as one of the most flexible options available to families and individuals who are undergoing estate planning.
They empower trustees to make decisions regarding the distribution of assets once you’re gone – so they can ensure that your wishes are carried out in the best interests of all involved.
Advantages of discretionary trusts
The principal benefit of discretionary trusts is flexibility. They are incredibly versatile, and the distribution of assets is easy. Beneficiaries can include surviving spouses, children, partners and other family members. Other advantages include:
Advance provision for family members: You can plan in advance so that your family are provided for in the event of an unexpected death.
Protection from creditors: Any assets or property held in trust is generally protected from creditors. That means it cannot be taken in the event of liquidation or bankruptcy.
Tax relief: Certain types of tax relief are available under trust fund schemes. Inheritance Tax can also be minimised where assets amount to less than the nil band rate
Disadvantages and problems with discretionary trusts
You should be aware of several disadvantages to discretionary trust wills before you arrange one. These include:
Complexity. Setting up and maintaining a solid discretionary trust structure can be complicated.
Potential loss. Only profits are distributed – losses remain as such.
Trust. You must trust the individuals you appoint as trustees, as they have greater powers under a discretionary trust. They are responsible for ensuring your wishes are carried out, so you have to be positive that they will do so.
Why do I need a discretionary will trust?
There are many reasons why people set up a discretionary will trust. Reasons include:
Individuals who are unsure of their exact wishes when making a will. If you’re not sure how you’d like your assets to be divided up when you’re gone then don’t worry – you’re not alone. This is actually very common. Discretionary Will trusts allow flexibility for this so that you can change your mind at any time.
Individuals whose beneficiaries’ welfare payments may be jeopardised by a lump sum gift. If you were to directly leave assets to a family member it may complicate or jeopardise their means-tested benefits payments. Leaving them funds via a trust prevents this from happening.
Individuals with beneficiaries at risk of bankruptcy. If your beneficiary is bankrupt or at risk of bankruptcy, there is a risk that the value of the estate you leave to them will be passed directly to creditors.
Individuals with beneficiaries going through a divorce or at risk of divorce. Using a discretionary trust will ensure that your beneficiary is not at risk of losing the assets you give them during divorce proceedings.
Beneficiaries who are vulnerable or disabled. Any beneficiaries who are unable to manage their own finances can be provided with a discretionary trust.
Property Protection Trust
A Protective Property Trust (PPT) can be established which will help to protect your estate from being taken to pay for care home fees.
The Property Trust can only be created whilst both partners remain alive. Normally with couples the property is divided 50/50, though these percentages can be different. Upon the first death, their share of the property is placed into the Trust to be administered by the Trustees.
The Will also specifies who is to be the ultimate beneficiary of this share in the property and this would normally be the surviving children of the deceased. The surviving partner, under the terms of the Trust, has the right to remain living in the property for the rest of their life. On the death of the second partner the Trust comes to an end and the property passes absolutely to the beneficiaries. The surviving partner does not own the deceased’s share of the property.
If the surviving partner chooses to sell and move to another property the proceeds from the sale can be used to purchase the second property and the terms of the Trust remain over the second property. If there is any excess capital following a sale then the money is invested and the surviving partner can take the interest that is generated as an income.
The deceased’s share in the property is fully protected for the beneficiaries, so even if the surviving partner remarries, the children’s inheritance is protected. This last point can be of particular interest to couples who have come together and have children from different partners. A PPT can help each person in a relationship ensure that their children inherit their share of the property, while giving their surviving partner the ability to live in the property for the rest of their life.
Who is a Home Protection Trust suited to?
This type of will is best suited to couples that are married or in a civil partnership who are concerned about the possibility of a long-term care requirement in the future.
They are well suited to you if:
- You would like to protect your estate and home against the cost of possible future care fees
- You want to ensure that your children benefit from the value of your share of the property upon your death
- You want to ensure your surviving spouse can remain in your property, but you want to safeguard your children from the financial consequences of them remarrying
- You’d like to ensure that your surviving spouse or partner can continue to live in and benefit from your share of the value of the property upon your death
What does it involve and how does it work?
Normally when you set out your wishes and make a will, your estate and the value of your assets will be passed directly on to your beneficiaries, likely your surviving spouse, then after your death to your children. A care requirement and other circumstances can sometimes complicate or affect this process.
For this reason, trusts and products like them can hold assets on behalf of the beneficiaries to guard against the effect of IHT and care costs reducing the value of your estate.
What is a Property Protection Trust Will?
A protection property trust or a protective property trust, as it is also known, is a type of legal structure that can be included as part of your will.
A lot of people have their money tied up in their house. A property protection will is designed to protect your home from being included in assessments that are carried out to determine how much you should contribute to long-term care fees.
However, it cannot be used solely for the aim of avoiding care home fees. A Property Trust covers a share of a jointly-owned house to ensure that surviving spouses or partners can continue to benefit from their deceased partner’s share in their home even when they are gone.
Should they have to go into long-term care facilities, their share of the property may be protected – and can be passed on to family members upon their death. It is also a useful tool for anyone looking at their estate planning and in particular ways to avoid paying inheritance tax.
Property Protection Trust disadvantages
Whilst there are many advantages, you do need to be mindful of the disadvantages of using a Trust. The property protection trust disadvantages can include the cost, unexpected tax consequences, and the possibility of the trust not working as you intended.
Therefore, we would recommend that you speak to a Trust specialist who can better understand your circumstances and then outline what the disadvantages may be for you.