Discretionary trusts have been used for many years in England and Wales and are a valuable tool in the tax planning armoury.A discretionary trust is a trust which has a class of beneficiaries amongst whom the Trustees may distribute income or capital or a combination of both from the assets of the trust known as the trust fund. The Trustees are the legal owners of the trust fund,The Trustees have complete discretion over the income and capital of the trust and how it is used. They may distribute it completely or in part or keep it for use in later years.The choice of Trustees is therefore very important. You should choose people who will be sensible and able to assess the beneficiaries’ needs both now and in the future. Professional trustees, such as solicitors, can be very valuable as they are governed by their regulatory bodies and understand fully their duties and obligations to the beneficiaries of the trust.Trustees of a discretionary trust can also impose conditions on payments to beneficiaries including making loans (which may be interest free) or buying property for a trust beneficiary.Discretionary trusts are particularly valuable and can assist the preservation of family and business wealth in the following ways:-
There are certain important dates to bear in mind when running a discretionary trust as follows:-
- Preserving assets whilst beneficiaries are young or undergoing full time education.
- Allowing business assets, for instance company shares, to be settled for the benefit of younger members of the family but keeping the active control with the company proprietor who will normally be the first named Trustee.
- By separating out assets into different ownerships in order to reduce the value of those assets for inheritance tax purposes.
- By holding assets for the benefit of disabled or improvident children or adults.
- By setting aside assets which do not then form part of the settlor’s or beneficiaries’ estate for inheritance tax purposes.
- By writing life policies into discretionary trusts to take them outside of the tax-payer’s estate for tax purposes.
- By protecting assets from the claims of creditors or other claimants.
- 10 yearly anniversary charge (levied at each 10 year anniversary during the lifetime of the trust)
- Exit charges (when assets leave the trust)
In general, the 10 yearly anniversary charge is currently levied at 6% of the amount by which the value of the trust fund exceeds the nil rate band (currently £325,000). This compares favourably with the rate of 20% for chargeable lifetime transfers or the rate of 40% payable on death both of which rates do not apply to assets held in discretionary trusts.We have considerable experience of both advising Trustees and acting as Trustees for a wide variety of trusts including discretionary trusts. We regularly prepare and advise on Trustees’ resolutions, meetings, responsibilities to and rights of beneficiaries, deeds of appointment and retirement of Trustees and advances of trust assets to beneficiaries. We also have experience in negotiating with H M Revenue & Customs on tax and trust issues.We can help you administer your trust in a tax efficient and timely manner to assist you in preserving your family or business wealth for future generations.