What Is a Discretionary Trust? - MoneyMagpie (2023)

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Inheritance trusts are very confusing, with a whole host of tax laws and regulations to accompany them. There are a variety of options on how to manage your estate and care for your loved ones after you’re gone. That means it can be hard to work out the best option for you. A Discretionary Trust is one option.

Discretionary Trusts are one way of helping your loved ones benefit from your estate in a tax-efficient way. Keep reading to find out what they are, advantages and disadvantages of them, and what steps to take to set one up.

  • What is a Discretionary Trust?
  • Advantages and Disadvantages
  • Inheritance Tax: How Does a Discretionary Trust Help?
  • Set Up a Discretionary Trust
  • More Useful Reading

what is a discretionary trust?

What Is a Discretionary Trust? - MoneyMagpie (1)

A Discretionary Trust is a particular type of trust in which the beneficiaries and their entitlements to the fund are not fixed. The Settlor (individual creating the Trust) needs to appoint at least two Trustees to manage the fund. These Trustees make decisions about the Trust distribution. The Settlor leaves instructions on their wishes – but Trustees don’t have to follow them. Trustees get final say on who gets what from the fund.

You could name beneficiaries but Trustees don’t have to give them a share, nor can beneficiaries demand one. It’s commonly used by grandparents leaving an inheritance to a growing family or future generations. If you want to allocate specific sums or proportions to beneficiaries, a Fixed Trust is a better route.

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By opening a Discretionary Trust, as Settlor you give the appointed Trustees the power to manage and make decisions about your estate on your behalf. Anyone can be a Trustees – friends, family, or you can hire a professional to do it. It’s a big job for someone to take on, so discuss it with your intended Trustees first to make sure they are happy to take on the responsibility.

A Discretionary Trust is a suitable way to put money away for future needs without the need to specify amounts or people in your will. For example, you can leave money to provide for grandchildren that haven’t been born yet. Or, if some beneficiaries may need more financial help than others, you can allow for this with a Discretionary Trust. Instead of having to decide an exact amount you want to leave to each beneficiary, it can be left open, allowing for whatever their future needs may be.


Depending on the individual Trust deed, the Trustees can decide:

  • What gets paid out (income or capital)
  • Which beneficiaries to make payments to
  • How often payments are made
  • Any conditions to impose on the beneficiaries

Trustees also become responsible for any income tax arising from investments held in the Trust.

advantages and disadvantages

Discretionary Trusts are complex and there are plenty of advantages and disadvantages to them. Weigh up the options and whether it would suit your circumstances before you set up a Discretionary Trust – and always seek help from a professional advisor.


  • Trusts can be set up to run for 125 years, making it easy to provide for future generations. Beneficiaries don’t have to be named but rather can include a wider class, such as “all my grandchildren”. This allows for potential grandchildren that hadn’t been born at time of writing.
  • These Trusts offer flexible and easy distribution of income and capital.
  • No beneficiary can demand a share of income or capital.
  • Discretionary Trusts offer asset protection and tax benefits.
  • Property held in a trust is legally protected from creditors; a creditor cannot take trust property in bankruptcy or liquidation.
  • Trust assets do not form part of a beneficiary’s estate in regards to tax purposes.
  • The value of a beneficiary’s share of the trust is unlikely to be used in any divorce or bankruptcy settlements.

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  • There is a great deal of complexity in setting up and maintaining a trust structure.
  • The Settlor (you) loses control of assets in a Trust.
  • Only profits, not losses, are distributed.
  • It’s an expensive way of managing your assets. Seek legal and accounting advice to set it up.
  • Beneficiaries could still face tax on their assigned portion should they profit – such as Capital Gains Tax when selling a given property.

inheritance tax: how does a discretionary trust help?

What Is a Discretionary Trust? - MoneyMagpie (3)

One of the key advantages to setting up a Discretionary Trust is that it can limit taxation on inheritance. In some cases, beneficiaries will not have to pay tax at all.

what is inheritance tax?

Inheritance Tax is a one-off tax paid on the value of the deceased’s estate given annual threshold. In the year 2020/21 that threshold is £325,000 per person. This means that you get £325,000 tax-free, but anything above that will be taxed at 40%. The only exception is when 10% of the inheritance is given to charity, then tax is reduced to 36%.

Spouses don’t pay IHT on their partner’s estate; they accumulate the £325,000 limit. So, married couples get a total of £650,000 in their estate before IHT kicks in.

As well as this, there is the residence nil rate band (RNRB) which adds an extra £175,000 IHT-free on the primary residence of the deceased. The RNRB can only be offset against a qualifying residential home that’s passed on to direct descendants.

how does a discretionary trust reduce it?

Money deposited into a Discretionary Trust is technically a gift. (You can gift up to £325,000 into the Trust before having to pay Inheritance Tax on it, without this affecting your nil rate band). The 7-year window starts as soon as the Trust is set up. If the Settlor survives that period then the value of their original gift into the Trust drops out of their estate in regards to Inheritance Tax. Subsequently, any assets put into a Discretionary Trust that then exceed the Inheritance Tax threshold will be taxed at various points:

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  • Initially on opening the trust, for Chargeable Lifetime Transfer (CLT) at the rate of 20%. Half the normal Inheritance Tax rate!
  • On each 10th anniversary of the trust, at a maximum of 6%.
  • When payments of capital are made to beneficiaries, or assets are taken out of the trust.

working example

Mr. X has an estate worth £900,000 and he decides to gift £325,000 into a Discretionary Trust. He outlives the 7-year the window and the £325,000 in the Discretionary Trust drops out of his estate for tax purposes. His estate is now worth £575,000 – he takes into account his NRB (£325,000) and RNRB (£175,000) which add up to a total of £500,000. This leaves a bill of £30,000 IHT on the remaining £75,000.

Without the Discretionary Trust, the IHT bill is £160,000.

Why not just gift the assets?

A Discretionary Trust treated like a gift is the same concept as giving money. You can give your family as large a sum of money (or property) as you like while you’re alive. If you survive 7 years, it’s no longer a gift and they won’t have to pay IHT on it. If you die within 7 years, there’s a tapered IHT tax rate to pay (which decreases the closer to 7 years you die).

So, having money in a Discretionary Trust you survive by 7 years means your beneficiaries pay 20% tax on the assets. They wouldn’t have this charge if you’d gifted them while you were alive and survived those 7 years.

However: gifting property comes with a range of problems. Putting assets into a Discretionary Trust means nobody can force you out of the property, sell it without your permission, or secure debts on it. This is where Discretionary Trusts outweigh outright financial or asset gifts.

Set up a discretionary trust

If you are considering setting up a Discretionary Trust, you should definitely seek professional help from both a financial adviser and solicitor! A trust is legally binding. Errors now negatively impact beneficiaries later. You don’t want any costly mistakes down the line.

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You also want to carefully choose your Trustees. These are people who will help manage your estate and make decisions on your behalf once you have died. Friends and family you can trust and who don’t mind taking on the responsibility are good choices. However, you can also hire someone to do it for you but obviously this will be charged.

You need to think about how you want to set up as a potential beneficiaries, although you don’t have to tell them you’ve done so. As this is a Discretionary Trust they may never see the benefits of it.

Bear in mind though that this is not a cheap process. In fact, it’s very costly and you should prepare to spend a couple of thousand pounds in order to make sure it’s set up correctly.

more useful reading

Read more about protecting your assets and providing for your family in your will with these articles:

  • What is Asset Protection and Why Do You Need It?
  • Can I Transfer My Property Deed to My Child?
  • How To Get a Will Written: An Easy Guide

*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.


What is a discretionary trust in simple terms? ›

Discretionary trusts

These are where the trustees can make certain decisions about how to use the trust income, and sometimes the capital. Depending on the trust deed, trustees can decide: what gets paid out (income or capital) which beneficiary to make payments to. how often payments are made.

What is a discretionary trust and how does it work? ›

Discretion is the right or ability to make a judgment or decision. A discretionary trust therefore is one where the trustee, commonly a private family controlled company, enjoys the freedom to make choices over the control and allocation of assets and income, for the benefit of the beneficiaries.

What is the purpose of a discretionary trust? ›

A discretionary trust gives trustees the power to decide how much beneficiaries get from a trust and when they get it. All capital and income is distributed completely at their discretion. This means there's more flexibility and assets can be protected if circumstances change for any reason.

What are the disadvantages of a discretionary trust? ›

They are a considerable responsibility for the trustees to take on and careful consideration should be given to who to appoint. Discretionary trusts could also result in disgruntled relatives who may not understand why they are not automatically entitled to receive money from the estate.

Who owns the assets in a discretionary trust? ›

Discretionary trust

The trustees have complete control over the assets and the income they generate, deciding how and when to give them to the beneficiaries.

Who pays the tax on a discretionary trust? ›

IHT on creation of trust

IHT will be charged at the lifetime rate of 20% on the amount above the settlor's nil rate band. There is no 20% lifetime tax on discretionary will trusts as the estate pays the IHT at the death rate of 40% on amounts in excess of the available nil rate band.

Can you take money out of a discretionary trust? ›

Discretionary trust

They are not entitled to receive anything from the trust as of right. The trustees have a massive amount of control over the trust assets and can ultimately decide who receives anything, when they receive it and how much.

What happens to a discretionary trust when someone dies? ›

If a beneficiary of a discretionary trust dies, no part of the discretionary trust will fall within the beneficiary's estate. Because, under normal circumstances, HMRC cannot levy an inheritance charge on a discretionary trust beneficiary, any inheritance tax charges will arise on the trustees instead.

Who controls a discretionary trust? ›

An entity controls a discretionary trust if the trustee either acts, or might reasonably be expected to act, in accordance with the directions or wishes of the entity and/or the entity's affiliates. All the circumstances of the case need to be considered in determining whether you satisfy this test.

How does a beneficiary get money from a discretionary trust? ›

Under a discretionary trust, beneficiaries do not have any automatic right to receive the money and/or property held in the trust. Instead, the trustees will decide when to distribute assets or income out of the trust and how much a beneficiary will receive, if anything.

How long does a discretionary trust last? ›

A Discretionary Trust may continue for up to 125 years from the date of the testator's death. This was limited to 80 years in the case of wills signed on or before 5 April 2010. The testator will provide how any undistributed assets must devolve when the trust comes to an end.

What is the difference between a family trust and a discretionary trust? ›

Discretionary trusts allow the person or people managing the trust to choose who can benefit from the trust and how much money beneficiaries will receive. What are family trusts? Family trusts, as generally understood, are discretionary trusts that hold a family's assets or run a family business.

Do you pay inheritance tax on a discretionary trust? ›

Discretionary trusts are subject to a periodic charge to inheritance tax, (even in the lifetime of the settlor). The charge arises on the tenth anniversary of the creation of the trust, and at the end of each subsequent ten-year period during the life of the trust.

What rights do beneficiaries have under a discretionary trust? ›

Beneficiaries don't have any legal entitlement to either income or capital under a Discretionary Trust. The Trustees have 'proprietary interest' or legal ownership. In reality, this means they have complete discretion as to whether or not to make payments of income or capital and to which beneficiaries.

How do I avoid tax on my discretionary trust? ›

In addition, the trustees can avoid discretionary trust tax, if they appoint out assets to a beneficiary for their life, or for a minimum duration of 5 years so that the beneficiary is entitled to the income from those assets.

What is another name for a discretionary trust? ›

It is sometimes referred to as a family trust in Australia or New Zealand. Where the discretionary trust is a testamentary trust, it is common for the settlor (or testator) to leave a letter of wishes for the trustees to guide them as to the settlor's wishes in the exercise of their discretion.

How many beneficiaries do you need for a discretionary trust? ›

For a Discretionary Trust to operate legitimately, there needs to be more than one beneficiary named.

Can a discretionary trust have a bank account? ›

Open a Bank Account

Once the discretionary trust has been established and the trust deed has been stamped (if stamping is required) then a bank account should be opened for the trust (in the name of the trustee as trustee for the trust).

What is the trust 10 year rule? ›

One such rule is the 10-Year Rule, which generally requires the beneficiaries of retirement accounts for those participants who died beginning in 2020 to withdraw the entire amount of the retirement account by the end of the 10th year following the year of the participant's death.

Can a beneficiary withdraw money from a trust? ›

Who Gets the Estate in a Trust? If the estate is set up in a trust, the named beneficiaries will have access to the property once the decedent passes away. Instead of waiting for months with a long probate process, you can usually gain access to the decedent's assets in a trust within a short time.

What is the 10 year charge on a discretionary trust? ›

10 Yearly Charge. This is often referred to as the periodic charge or principal charge and arises when the trust reaches its 10 year anniversary (of the date on which the trust commenced) whereby it has to be assessed to see if any IHT is due.

Can my parents take money out of my trust fund? ›

Generally money cannot be withdrawn from the account until the child is 18.

How much tax do you pay on trust income? ›

10% of Income Tax, in case taxable income is above ₹ 50 lakhs. 15% of Income Tax, in case taxable income is above ₹ 1 crore. 25% of Income Tax, in case taxable income is above ₹ 2 crore.

Can a trustee remove a beneficiary from a discretionary trust? ›

Changing Trustees and adding Beneficiaries

It is quite common for the Settlor of the trust to retain the ability to appoint additional trustees during their lifetime, and also add or remove potential beneficiaries from the trust.

Does a discretionary trust avoid probate? ›

Discretionary probate trust

By settling (i.e. transferring) assets in lifetime on such a trust means that on the death of the settlor (i.e. the person who settles the assets), probate is not required with respect to the trust assets.

Who is the ultimate owner of a trust? ›

Generally speaking, a trust involves the legal ownership of the property by the trustee for the benefit of the trust's beneficiaries. With a discretionary trust no individual person owns the benefit of the assets as it is up to the trustee to decide who receives income or capital distributions from the trust.

How can trust money be disbursed? ›

Trust money can only be dispersed in accordance with a direction given by the person on whose behalf the money is been held. Further, trust money can only be withdrawn by cheque or electronic funds transfer. Regulation 65 of the Regulations governs the withdrawal of trust money for the payment of legal costs.

What happens to a discretionary trust when the settlor dies? ›

The death of the settlor will mean that the settlor's rights terminate and the trust fund is available to the other beneficiaries. Remember that the settlor's rights under a DGT have no value in the event of his death. The only IHT implications will be if the death occurs within 7 years of the original gift.

What does a discretionary trust look like? ›

When you set up a Discretionary Trust, you identify a class of beneficiaries such as children and/or grandchildren who can receive capital and/or income from the trust at the discretion of the Trustees. No one beneficiary has an absolute entitlement to either income or capital.

Can beneficiaries dissolve a discretionary trust? ›

Beneficiaries terminating a trust

The views of the trustees are not paramount. If the beneficiaries wish to terminate a trust and are all over 18 years with full capacity, then they can unanimously end the trust and distribute the assets, even if the trustees disagree with this.

How does a discretionary trust pay tax? ›

Discretionary trusts are 'flow through' vehicles. This means that they are not generally subject to tax. Additionally, trust income is primarily taxed in the hands of beneficiaries. Beneficiaries will pay tax on the share of the trust income to which they are 'presently entitled' or 'specifically entitled'.

Can I give my house to my son to avoid inheritance tax? ›

The good news is that you could gift your home to your children and if you lived for at least seven years after the gift was made, it would be removed from your estate and no inheritance tax would be due.

What assets should not be in a trust? ›

What assets cannot be placed in a trust?
  • Retirement assets. While you can transfer ownership of your retirement accounts into your trust, estate planning experts usually don't recommend it. ...
  • Health savings accounts (HSAs) ...
  • Assets held in other countries. ...
  • Vehicles. ...
  • Cash.
Jul 1, 2022

How much money can you gift tax free? ›

The annual federal gift tax exclusion allows you to give away up to $16,000 each in 2022 to as many people as you wish without those gifts counting against your $12.06 million lifetime exemption. (After 2022, the $16,000 exclusion may be increased for inflation.)

Can a discretionary trust be challenged? ›

One of the ways in which a beneficiary of a discretionary trust may look to challenge the exercise of the trustees' discretion is to request information and documentation in relation to the trust and the decisions which have been made in relation to the distribution of the trust fund.

Can a discretionary trust distribute to anyone? ›

The trustee has an absolute discretion as to how income and capital of the trust is distributed on a year to year basis. Therefore, the trustee can distribute the whole or part of the income for a year and capital to any one of the primary, secondary or tertiary beneficiaries.

Can a trustee and beneficiary be the same person? ›

There is no requirement that the settlor, trustees and beneficiaries be different. In fact, an individual can be all three in the same trust. However, there can be adverse tax consequences if the settlor is a trustee or beneficiary — we'll discuss this later in the bulletin.

What is the difference between a trust and a discretionary trust? ›

They are different to discretionary trusts as, in discretionary trusts, the beneficiaries have no absolute rights to the trust assets, whereas in bare trusts, beneficiaries have absolute rights to the trust assets and the trustee must act in accordance with their instructions.

What happens to a discretionary trust when the beneficiary dies? ›

If a beneficiary of a discretionary trust dies, no part of the discretionary trust will fall within the beneficiary's estate. Because, under normal circumstances, HMRC cannot levy an inheritance charge on a discretionary trust beneficiary, any inheritance tax charges will arise on the trustees instead.

How does a discretionary trust end? ›

Some trusts naturally end as a result of specific event occurring, such as a beneficiary reaching the age of inheritance or on the death of a life tenant. Other trusts, such as Discretionary Trusts, usually end when the trustees exercise their powers to bring the trust to an end and distribute all of the assets.

What is the 2 year rule for discretionary trusts? ›

If you place assets in a discretionary trust created by your will, your executors have two years from the date of your death within which to allocate and transfer those assets to your beneficiaries. They can even transfer them into other trusts (but with no further two year period).

Can a beneficiary take money out of a trust? ›

However, a beneficiary can contest the wishes of the trust in court. They may choose to do this to gain access to complete accounting for the trust, force the distribution of funds or remove the trustee completely from the trust.

Can a trustee withdraw money from a trust account? ›

Yes, you could withdraw money from your own trust if you're the trustee. Since you have an interest in the trust and its assets, you could withdraw money as you see fit or as needed. You can also move assets in or out of the trust.

Does a discretionary trust need a bank account? ›

Once the discretionary trust has been established and you have paid any relevant stamp duty and applied for an ABN, then a bank account should be opened for the trust in the name of the trustee.


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