The advantages of discretionary Will trusts

Making a Will can be a particularly demanding task if your estate is difficult to quantify, your assets are in a state of flux or the situation of your chosen beneficiaries is unsettled. However, it would be unwise to decide that it is too difficult to write a Will and to take no action, when you could instead choose a form of Will which allows for changing circumstances to be taken into account. This is achieved by a discretionary Will trust and in this article we look at what they are and how they work.  We also review a Scottish case where a discretionary Will trust might have been of assistance.

How discretionary trusts work

Traditionally, Wills are thought of as containing very specific directions as to who is to receive what assets from an estate (rather like Shakespeare’s famous gift of his “second best” bed to his wife). However, in some circumstances it can be difficult for the testator to be so prescriptive, perhaps because his assets are in a state of flux or because the situation of the people he would like to benefit is unsettled.  For example, a farmer has three sons and wishes to pass on the farming business to whichever son is interested in a farming life but, at the time that he makes his Will, his sons are very young and it is unclear what they want to do in later life. Another testator might be making his Will at a time when one of his children’s marriages is under significant strain and it is uncertain whether this will end in divorce or reconciliation.

How can discretionary trusts help in these situations?

Discretionary Wills provide that part or all of a testator’s assets are given to trustees to hold on discretionary trusts for the benefit of a number of specified beneficiaries. The discretionary trusts mean that during the trust period (typically 125 years from the testator’s death) the trustees have discretion over how the assets in the trust and their income are distributed amongst the beneficiaries.

Taking the example of the farmer above, the beneficiaries of the trust could be his three sons and perhaps his wife and grandchildren. While his children are young, the trustees could use the income in the trust to benefit all the beneficiaries and, when it becomes clear that one son wishes to follow in his father’s footsteps, then the trustees could consider transferring the farm out of the trust to that son, if this were advisable. The trustees would be guided by a letter left by the testator expressing his wishes.

In the case of the testator whose child’s marriage is in difficulties, the child’s share of the estate could be held in a discretionary trust and passed over to him by the trustees when the situation is more settled. This should provide some protection against the assets in the estate becoming embroiled in a disputed divorce financial settlement.

Case study: How a discretionary trust may have prevented a dispute over a Scottish estate

Captain Kenneth Lumsden made his Will in 2008 which disposed of over £9 million of assets including a landed estate, Banchory Devenick, on the outskirts of Aberdeen valued at over £3 million. Mr Lumsden wished to leave Banchory Devinick primarily to his eldest son, Rupert, but he wished to ensure that if any part of the estate was developed the additional value arising from the development should be shared amongst his children. Captain Lumsden in a codicil to his Will stated that, “Any development granted permission on any part of the estate is [to be] equally divided three ways between my children.”

At the time the Will was made there was a possibility of a new town being built on the estate but after Captain Lumsden’s death it became apparent that this would not come to fruition. After the prospect of the new town fell away, Rupert entered into negotiations to sell the estate at agricultural value. His brother and sister took court action to try to prevent the sale, arguing that the condition in their father’s codicil should be imposed on the title to the estate and bind the new purchasers. The Scottish Court of Session decided that the attempt to block the sale of the estate should not succeed and that Rupert’s siblings’ case was a weak one.

In the same circumstances, if Captain Lumsden had put Banchory Devenick into a discretionary trust in his Will, backed up with a clear Letter of Wishes, the trustees could have ensured that any development gains were shared between all the children, that the estate was sold when it was advantageous to do so, and the proceeds transferred as Captain Lumsden wished. This would have provided much greater flexibility, with less chance of an expensive court dispute arising later.

Are there any tax implications to using a discretionary trust?

One of the main differences between leaving an outright gift to an individual, or a gift to a Will trust where the beneficiary is entitled to the income, is that the assets in a discretionary trust are not taxed on a beneficiary’s death. Instead there is a charge to inheritance tax at a maximum rate of 6% every ten years and when capital leaves the trust.

This compares to a potential 40% charge at an unknown time in the future which would apply to outright gifts to individuals, or to other types of Will trusts.  There are other tax differences which can be considered in the light of a particular testator’s personal circumstances, but in situations similar to those outlined above the inherent flexibility and protection offered by discretionary Will trusts often make them the best option for achieving the testator’s wishes.

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