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Discretionary Trusts: What you should know

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Setting up trusts can often prove to be a complicated process and if not properly drafted can often have unintended effects. This is especially true of discretionary trusts. These are trusts which as the name suggests give express powers to the trustees to make decisions on certain matters related to the trust. This discretion can cover matters such as: 

  • What is paid out from the trust in terms of income or capital
  • Who receives payments 
  • How often payments are made 
  • Any conditions which attach to beneficiaries 

It is important when creating a discretionary trust that the decisions a trustee can and can not make are carefully controlled to meet the purpose you intend the trust to serve. The courts will interpret the trust instrument literally which can afford trustees wide ranging powers if clauses are drafted in a vague or open way.

Things to Consider When Making a Discretionary Trust 

The Beneficiaries 

The first consideration aught to be who you wish to benefit from the trust. If you have a fixed list of individuals or bodies that you intend to benefit you may wish to provide the trustees with no discretion in that regard however this raises an issue where new children or grandchildren are born before the trust becomes effective. 

To guard against this risk you may wish instead to designate a class of people as beneficiaries for example “My Grandchildren” or “My Sisters” this allows for the expansion of a trust to cover individuals who may not have been born at the time the trust was created. 

If you wish to create a trust which has a wider group of beneficiaries you may wish to assign the trustees the power to amend in order  add or remove individuals , for example great grandchildren, this will however give them wide ranging control over who receives a benefit and they would not be obliged to make payments to all beneficiaries. 

The Subject Matter of The Trust 

The second consideration will be what it is that you want the trustees to distribute. Trusts traditionally take one of two forms Exhaustive , where the trustees are obliged to distribute all income from the trust, and Non-Exhaustive , where trustees are permitted to accumulate income, in either case the trustees will be obliged to distribute the entire fund when the trust reaches the end of it’s lifetime which may well be up to 125 years from when the trust is enacted. 

How Often Payments Should Be Made from The Trust

Thirdly you may want to state clearly a fixed time frame for the making of payments from the trust , for example yearly, in the absence of a clear clause trustees will have the discretion to decide for themselves and they could legitimately decide to make no payment at all until the end of the trusts lifetime. 

The Conditions of The Trust 

If you wish there to be any conditions imposed on those seeking to benefit from the trust you should also make this clear in the trust instrument. Conditions could include not having a criminal record or remaining unmarried. It is important to remember however that the court may well strike out any condition which is considered too strenuous or controlling to be fairly enforced. You can discuss any conditions you intend to impose with you solicitor who can assist you in ensuring it is enforceable. 

It is advisable to consult a solicitor when creating any trust however this is especially pertinent when creating a discretionary trust. Our team at Monarch Solicitors will be able to assist you in creating a trust instrument which best meets your intention.

Call our trust solicitors in Manchester 0161 820 8888 or call 0208 889 8888 for our solicitors in London.

We will happily provide a free 30-minute consultation on your matter. Give us a call today!

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