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Discretionary Trusts - an introduction

View profile for Julie Frampton
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A Discretionary Trust is a legal arrangement where trustees have discretion about how to use the income of the trust and sometimes the capital. The trust is used to protect assets such as land, buildings or money for the benefit of the beneficiaries to the trust. These assets are known as ‘trust property’. The trustees are legally responsible for the assets held in the trust and are required to manage the trust and carry out the wishes of the person whose assets were placed into trust – this person is known as the ‘settlor.’

When the trust is created, by will or a legal document known as a deed of trust, the powers of the trustees will depend on what was stipulated by the settlor. The trustees have ‘discretion’ about how to use the trust’s income and may also be able to ‘accumulate’ income and add it to the capital. Discretionary trusts are sometimes set up to put capital aside for a future that is not yet known – ie- a grandchild that may require financial assistance or beneficiaries who are perhaps not capable enough to deal with financial matters themselves. They can also be used as a means of mitigating as far as possible, an estate’s liability to Inheritance Tax.

Julie Frampton, Wills and Tax Executive, says “Income generated by a discretionary trust is subject to Income Tax and it is the responsibility of the trustees to declare and pay any Income Tax due. There are special rates of tax for trusts, including discretionary trusts. Special rates apply to trusts with vulnerable beneficiaries.”

Since the trustees under a discretionary trust have wide ranging powers it is vitally important to give careful consideration as to who should be appointed as the trustees. If an estate is of high value or complex it may be sensible to appoint an independent trustee such as a solicitor.

For a free initial meeting please call 01202 499255 and Julie or a member of her team will be happy to discuss any questions you may have.