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A discretionary trust is a type of trust where the trustees have discretionary powers (which may be broad or limited by the trust deed) over how and when to distribute the trust's assets among a defined class of beneficiaries.
The objectives are often long term and with an emphasis on flexibility. Careful choice of trustees is hugely important in setting up any type of trust but even more so with a discretionary trust, where trustees may be given wide powers.
The flexibility that makes these trusts valuable also brings complex responsibilities for trustees, and requires careful planning to address factors such as trust duration, choice of trustees, contingencies, and investment policies. Specialist guidance ensures the trust is structured correctly, operates smoothly, and meets the settlor’s intentions. While legal advice is crucial, tax matters should be considered separately with a specialist adviser.
We find that most clients who want to create a discretionary trust do so because of concerns about family issues. They are seeking to preserve value for beneficiaries and possible future generations. Reasons commonly include :
Family business succession concerns - There is a family business and there are concerns about how beneficiaries would run the business. The availability of Business Property Relief (“BPR”) can often be factor as well but specific advice should be sought in relation to BPR aspects of discretionary trusts.
Concerns about financial irresponsibility - One or more of the beneficiaries has an unstable lifestyle, perhaps with addictions, mental health problems or a bad track record of dealing with money.
Providing for a beneficiary with a disability - One or more of the beneficiaries has disabilities which mean they need long term care and are perhaps unable to make decisions for themselves.
Protecting future generations - You specifically want to ensure that your legacy benefits grandchildren, whether these are living or not yet born.
Protecting capital - You may want to protect the capital value of your assets. The trust can provide that beneficiaries will only receive income under the trust, with income generation being the prime objective for the trustees to use their discretion to achieve.
Duration of the trust - fixed term, age-based, or multi-generational (within UK perpetuity rules).
Choice of trustees - need for competent and reliable individuals or professionals; consider multiple trustees.
Contingency planning - trusts deed to include replacement procedures for resignation, incapacity, or death of trustees.
Investment policy - a clear policy on risk and return and permitted or restricted types of investment and/or risk.
Beneficiary considerations - do you want to include guidance on discretionary distributions based on need, age, or circumstance?
Conflict management - mechanisms to handle any disputes.
Record keeping and reporting - to maintain transparency and legal compliance.
Our instructions typically include :-
• Drafting a clear and legally robust trust deed.
• Guiding trustees on duties, powers, and reporting obligations.
• Advising on beneficiary disputes or claims.
• Ensuring compliance with regulatory or reporting requirements.
• Explaining how estate funds can be used to pay for legal guidance, reducing personal liability for trustees.
Even for experienced trustees, professional guidance can save time, reduce risk, and help preserve trust assets effectively.
Tax is almost always a prime consideration.
Discretionary trusts are less tax advantageous now primarily because of the introduction of the transferable nil rate band between spouses in 2007 (meaning couples can combine their inheritance tax allowances without needing a trust) and changes to trust taxation including periodic charges every 10 years and exit charges when assets leave the trust.
Anti-avoidance legislation applies to family trusts where the settlor retains any interest in the assets and the assets will be included in the estate for Inheritance Tax (IHT) purposes. Family trusts are also charged tax of up to 6% of the value of the assets every 10 years and upon exit.
A lifetime discretionary trust is often created when someone wants to start tax planning early, retain some control over assets while alive, or protect assets for vulnerable family members during their lifetime. These can also help with immediate asset protection or business succession planning.
Will trusts (created on death) are more common when the main concern is managing inheritance after death, particularly in complex family situations like second marriages.
Can a beneficiary also act as a trustee?
Yes, but it’s generally advisable to include at least one independent trustee to avoid conflicts of interest.
Can property be placed into a discretionary trust?
Yes, including property. Special care is needed with main residences due to potential inheritance implications.
What rights do beneficiaries have?
Beneficiaries have no automatic entitlement. Their benefit depends entirely on the trustees’ discretion.
How long can a discretionary trust last?
Duration should be set in the trust deed. Some trusts have fixed terms, others continue until conditions are met, such as a beneficiary reaching a certain age.
What happens if a trustee cannot continue?
Trust deeds usually include replacement procedures for resignation, incapacity, or death of trustees to ensure continuity.
Can a beneficiary be excluded from receiving distributions?
Yes, trustees can exclude beneficiaries, but decisions must be made in good faith and follow the trust deed.
Are there tax considerations with discretionary trusts?
Yes, including income, capital gains, and inheritance tax. Trustees and settlors should seek specialist tax advice.
How many beneficiaries must a discretionary trust have?
A discretionary trust must have a class or group of potential beneficiaries, not just a single individual with no alternatives. The trustees need to have genuine discretion over who to benefit, so the trust should name more than one person or a defined class (e.g., “my children and grandchildren”). If there is only one possible beneficiary, the trust risks being treated as a fixed trust rather than discretionary.
What ongoing responsibilities or costs are involved in running a discretionary trust?
Trustees must manage the trust actively. This typically includes keeping accurate accounts and trust records,filing trust tax returns (income tax, CGT and possible IHT charges),complying with the Trust Registration Service, managing and investing trust assets prudently, making decisions about distributions and maintaining beneficiary records. Because of these ongoing duties, and the potential for ten-year and exit charges for relevant property trusts, running a discretionary trust often involves regular professional advice and administrative costs.
Discretionary trusts provide flexibility, protection, and control, but carry complex responsibilities for trustees. Specialist legal advice ensures the trust is structured, administered, and managed appropriately, while separate tax advice addresses obligations.
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