Bulletins | January 19, 2016

Do I need a discretionary trust in my Will?

When it comes to writing a Will, clients very often, quite understandably, want their Will to be as simple and as straightforward as possible. But where (amongst other reasons) the estate is fairly significant, children are involved, or there are issues within the family that require sensitive handling, using a trust in your Will can be a good way of helping prevent problems and family rifts after your death.

A discretionary trust is a form of trust where no one beneficiary has a definite share of the trust fund; instead, a class of beneficiaries are named. This flexible type of trust is often used after the death of the surviving spouse to hold the couple’s combined estate for the couple’s children and/ or other family members, and these individuals will be named in the class of beneficiaries. The trustees (who, again, are usually family members, but could include a professional) have discretion to apply the funds in the trust to any beneficiary in such amounts, and at such times, as they choose. The testator will typically leave a non-binding letter of wishes to the trustees, guiding them on when she/he might want them to make distributions, and generally how to administer the trust for the beneficiaries’’ benefit. A discretionary trust can be especially useful where the beneficiaries are young, the testator has concerns that they may not be able to manage large sums of money, or the money could be at risk of being claimed by a third party such as a child’s partner/spouse.

In Choice Magazine’s “Ask the Expert” column (January 2016 edition), Paul Levy, an associate in Wedlake Bell’s Private Client team, was asked a question from a reader whose solicitor had included a discretionary trust in his Will but who now wanted it removed, about whether he could do this by making a Codicil himself deleting the wording creating the trust. Below is a summary of Paul’s answer.

“We would advise against a “DIY” approach. Unfortunately we deal with a number of estates where “homemade” Wills are invalid which can lead to an intestacy and adverse tax consequences.  In your case, it is unlikely to be as simple as striking out the discretionary trust, as there are likely to be consequential amendments needed to make the Will work. Involving a solicitor will ensure that the amendment is valid, but will also give the opportunity to discuss whether the removal of the discretionary trust is what you really want to do.

Not only can trusts maximise inheritance tax (“IHT”) advantages, but they also offer substantial flexibility and protection of the underlying capital from longer IHT liabilities and other potential asset protections concerns, i.e. remarriage, abilities of children to handle large sums of money, and the rising cost of care. If the administration involved with a trust is a concern, the trustees could instruct a solicitor and/or accountant to assist, leaving them to deal with the day-to-day decision-making.

A solicitor can also advise you on the ability for the surviving spouse to “vary” a trust in a Will after death. For instance, if the survivor does not think the trust is necessary, the trust can be wound up at that point and the Will be read for IHT purposes as if the trust did not exist. Deferring the matter until death would allow the survivor to consider the circumstances and take appropriate advice at the time.  If you get rid of the trust now, you are not giving yourself that flexibility.”

For more information on discretionary trusts and making a Will, please contact Paul Levy or your usual Wedlake Bell adviser.