Setting up a Trust
What is a Discretionary Trust?
Placing money or property in a Discretionary Trust means it doesn’t pass to an individual. Instead it is managed by trustees who can be directed to act in someone’s interest and for their benefit. You choose the trustees when you set up a Trust, and they appoint others as necessary. You can say how you want them to act in a Letter of Wishes. For example, you might ask the trustees to allow a beneficiary of the Trust to live in a property rent free for their lifetime, or to use money in the Trust to pay everyday bills.
You can set up a Trust at any time. If it’s during your lifetime, most people include themselves among the trustees. If it’s in your Will, it won’t come into effect until you die, so you choose the trustees who will manage it.
What are the down sides?
Setting up a Trust is costly and it can be complicated. A solicitor can advise on what works best, but you are responsible for making sure what they suggest will meet your aims.
If the Trust will generate income, for example through investments or by renting out property, the trustees are responsible for filing tax returns and other general administration.
No one has a right to anything managed by a Discretionary Trust, even if they are named as a beneficiary. In practice a Trust usually acts according to the wishes and aims of the people who set it up, but the trustees can depart from this if they choose. So it’s important to appoint trustees who understand the principles you want them to use in making decisions, as well as the decisions themselves.
A Letter of Wishes can specify how you want the trustees to act but this is for guidance and isn’t legally binding.
How do I set up a Discretionary Trust?
You must do this through a solicitor.
- You will need to explain the purpose of the Trust and what you want it to achieve. A solicitor can advise on what works best based on their experience, but you are responsible for making sure what is suggested will meet your aims.
- It helps to know what you plan to place in the Trust: e.g. a sum of money, or the deeds of a property. You can set up the Trust well before it is needed, with just a small amount of money in it.
- You specify who is intended to benefit from the Trust (the “beneficiaries”). You can name any number of beneficiaries.
- You also choose the trustees. These can be friends or family, or independent professionals such as a firm of solicitors. It’s important to choose people you trust to make responsible decisions, as they will have complete control over how the Trust is managed and how any money is used, including if and when to make payments on behalf of the beneficiaries.
- The solicitor will draw up a Deed of Trust and should advise on the wording of a Letter of Wishes to instruct the trustees. You can update the Letter of Wishes at any time if you want to take changing circumstances into account.
