What Is a Discretionary Trust?

Creating a trust or leaving assets or capital in trust through your will allows you to control their use after your death and protect your property and wealth from creditors and unnecessary tax implications.
If you leave your home and savings directly to your children, you lose control over how they use them. If you make a gift to your children to help them onto the property ladder, that child could get into financial difficulty or a messy divorce. In these circumstances, your gift could be seized by creditors or become part of the divorce settlement paid to their spouse.
If your spouse leaves everything absolutely to you, like in most wills, and you subsequently need long term care, your house could be sold and the entire value used to re-pay the local authority.

Avoiding Inheritance Tax (IHT) is a hot political potato at present especially considering the Nil rate band has been frozen again for another 5 years until 2026. The last increase was in 2009. Many people resent the fact that they pay income tax of up to 40% in their lifetime and have to hand over a further 40% of their home and savings to the Inland Revenue on their death. The Chancellor has announced measures to allow spouses to transfer their allowance to the second partner to die, but the 2009 – 2010 allowance is still only £325,000 per person so that any couple with a home and savings over £650,000 will pay IHT on the second death. Further more, the transferable allowance does not apply to unmarried couples who could easily pay up to £130,000 more IHT than married couples as only one allowance may be used when passing the house on to their children.

Creating a trust in life and/or on your death can help you avoid losing wealth and property to avoidable financial and tax issues.

The Benefits Of Various Trusts

  1. You can dictate who benefits and under what circumstances long after you die or make the gift.
  2. All Income Tax paid on interest received by trustees may be claimed back by your children and grandchildren, depending on their tax situation.
  3. You can advance capital to your children from a trust but claw it back if they get into difficulty.
  4. Capital and houses can be protected from divorcing spouses.
  5. If you have to sell your home to pay for care costs, you can shelter up to half its value and still retain income from the sale of the house.
  6. Your children can be prevented from squandering your money when you die.
  7. You can reduce your IHT bill without giving your savings to your children while you are alive.
  8. Business Owners and Directors of unlisted companies can avoid IHT on the proceeds of the sale of their Business Assets and shares.
  9. Disabled Children can have money held specifically in trust and can enjoy tax benefits as a result.
  10. Unmarried couples with children can arrange for homes up to £600,000 to pass to their children while allowing a surviving partner to have the family home until they die.