Discretionary trust
The trustees have complete control over the assets and the income they generate, deciding how and when to give them to the beneficiaries. ` People may set up this kind of trust for their grandchildren, making the grandchildren's parents trustees.
An entity controls the discretionary trust if the trustee either acts, or might reasonably be expected to act, in accordance with the directions or wishes of the entity/or the entity's affiliates, or both the entity and its affiliates.
A Discretionary Trust is a legal arrangement which allows the owner of a life policy (the settlor) to give their policy to a trusted group of people (the trustees), who look after it. At some time in the future they pass it on to some people from a group that the settlor has decided (the beneficiaries).
With a Discretionary Trust, the Trustees are given total control over the assets as well as the income generated. Under a Discretionary Trust, the Beneficiaries do not have an automatic right to receive the assets within the trust.
A Trustee is a person who acts as a custodian for the assets held within a Trust. He or she is responsible for managing and administering the finances of a Trust per the instructions given. Often, the person who creates the Trust is the Trustee until they can no longer fill the role due to incapacitation or death.
Disadvantages of discretionary trusts
Trusts are complex. Unless professional trustees are appointed, which will incur costs, lay trustees will have to navigate trust and tax law, and manage the assets of the trust. They will also have to decide how to exercise their discretion as to the beneficiaries of the trust.
Other trusts, such as Discretionary Trusts, usually end when the trustees exercise their powers to bring the trust to an end and distribute all of the assets. When taking steps to end a trust, trustees should consider: Recording their final actions in trustee minutes.
In the case of a Discretionary Trust, the Trustee has legal control of the funds. Therefore, they are the legal owner. However, the funds are held and distributed to benefit the beneficiaries. The beneficiaries are the beneficial owners.
Parents often make the mistake of choosing a trustee based solely on personal relationships without considering their financial acumen, integrity, and willingness to serve. Choosing one of the children is not always the best choice as other beneficiaries may see their role with suspicion.
The trustees of a discretionary trust must often exercise their discretion over the income and capital of the trust fund between potential beneficiaries (for example, a number of siblings in one family). When exercising their discretion, trustees must avoid taking into account irrelevant or irrational factors.
A trustee typically has the most control in running their trust. They are granted authority by their grantor to oversee and distribute assets according to terms set out in their trust document, while beneficiaries merely reap its benefits without overseeing its operations themselves.
In addition to following all directions in the trust document, the trustee is responsible for: Assuming legal responsibility for administration of the trust. Taking control of and protecting trust assets.
How is the 10-Year Charge calculated? The calculation of the 10-Year Charge for discretionary trusts, classified as 'relevant property' trusts, requires evaluating the total trust assets against the nil-rate band and applying a 6% tax rate on any excess value.
If it is a discretionary trust, you may not have to do much to exclude a beneficiary. The trustee has the discretionary power to exclude beneficiaries from the trust. However, the trustee must act in good faith and for the benefit of the beneficiaries.
A trustee is in charge of the trust and manages the trust assets on behalf of the grantor and according to the trust agreement. A trust beneficiary receives the assets of the trust.
Beneficial ownership of the trust property lies with the beneficiaries. The trustee can also be any competent person over the age of 18 (individual) who is not bankrupt or under some other legal disability.
A trustee is named in the trust document or appointed by a court order to hold and manage assets such as stocks, bonds, mutual funds, real estate, or property for or on behalf of the beneficiaries. The trustee named may be a business entity or an individual.
The settlor: The settlor is the person responsible for setting up the trust and naming the beneficiaries, the trustee and, if there is one, the appointor. For tax reasons, the settlor should not be a beneficiary under the trust.
Beneficiaries of a discretionary trust are not entitled to receive anything as of right. Instead the beneficiaries have the potential to receive money and the right to ask the trustees to exercise their discretion in their favour.
Discretionary Trust assets do not form part of your Estate
Even if you are the personal trustee of your family trust, the trust will usually continue to have life after your death. The assets are not “your” personally owned assets that are part of your estate to be gifted via your Will.
Discretionary trusts are sometimes set up to put assets aside for: a future need, like a grandchild who may need more financial help than other beneficiaries at some point in their life. beneficiaries who are not capable or responsible enough to deal with money themselves.
Since the purpose of the trust is to provide support for the beneficiary, he cannot alienate his interest in the trust. Thus, the beneficiary's creditors cannot attach the funds in the trust.
A lifetime discretionary trust or life interest trust designed to hold cash or investments will cost around £4,400 plus VAT to set up including our estate planning advice, the trust and letter of wishes, IHT reporting and trust registration with HMRC.