Role of Discretionary Trusts in Estate Planning
Setting up a trust is a key component of comprehensive estate planning. While traditional trusts are a safe bet, discretionary trusts, also otherwise known as trust funds, can be an important part of modern-day estate planning. Often known to be an important part of estate planning for the wealthy, they can be used by anyone who wants to pass their estate to future beneficiaries, such as grandchildren, individuals with disabilities, etc.
Discretionary trusts offer more flexibility compared to traditional trusts and grant trustees complete discretion on how and when beneficiaries receive access to funds or assets. They are a practical way to ensure the financial security of your intended beneficiaries. Discretionary trusts are especially suitable for beneficiaries who are dealing with financial instability, are minors or are not yet born. They are also beneficial for family businesses that want to pass on the business to the next generation.
In this article, we discuss some of the ways a discretionary trust can be a useful legal framework for estate planning.
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Greater Autonomy for Trustees
Discretionary trusts are called so because they give trustees the utmost discretion in determining which beneficiaries gain access to trust funds and under what terms and conditions. This is helpful when beneficiaries have not yet demonstrated financial prudence because they are young adults, are minors or are not ready to manage their inheritance due to other personal issues.
Settlor-beneficiary relationships are subject to changes, and a discretionary trust enables trustees to protect assets against such changes. This is especially relevant in cases where the beneficiary’s access to funds is subject to terms and conditions. Trustees are at their sole discretion to amend such conditions as they deem appropriate for the highest good of the beneficiaries.
Flexibility in the Distribution of Assets
Trust funds or discretionary trusts can lend great flexibility to estate planning. This is because they entrust trustees with sweeping powers to determine the terms and conditions of allocating estate funds to beneficiaries. Trustees can disburse funds from the discretionary trust as and when the need and circumstance merits it. This allows beneficiaries to receive help on a need-to-need basis from the trust and limits potential misuse of funds. As a settlor, using a discretionary trust also allows you to take a wait-and-see approach before making fixed decisions about allocating your assets.
For example, your only grandchild who you want to pass the estate to, struggles with alcoholism. With a discretionary trust, you can give your trustees guidance and instructions to disburse funds to your grandchild when they undertake a rehab program or stay addiction-free for a stipulated period. This prevents your assets from being squandered and protects the value of your estate to truly benefit your recipient.
Benefits of a Discretionary Trust for Vulnerable Beneficiaries
Discretionary trusts are not only flexible legal frameworks that are essential for estate planning but also protect beneficiaries. It’s especially relevant in estate planning for those with children or family members with disabilities or who have mental or physical incapacity due to illness. Vulnerable people like those with mental health conditions like depression or those struggling with addictions also come under the purview of a discretionary trust.
Trust funds were designed to protect such beneficiaries as they will not be considered a part of the beneficiary’s legal estate. This protects them from undue claims and unscrupulous agents while also limiting the possibility of court oversight.
Reducing Inheritance Tax
Discretionary trusts are designed to reduce inheritance tax burdens on your estate. Therefore, it’s a wise idea to place your assets in a trust fund. This way your beneficiaries are protected from paying additional taxes while also lowering your tax liabilities. This also helps beneficiaries limit the value of their own estate from a tax perspective, while still having access to funds over time.
Beneficiaries can also borrow funds from the trust as and when the need arises. Since this borrowing of funds is free of interest charges, it helps beneficiaries manage their finances better. It also limits the possibility of beneficiary funds being misused or squandered at one go if they were granted a lump sum amount.
Optimising your Assets for Growth
Trustees can be given the responsibility of managing your assets and maximising their value by allowing for smart investments. You can instruct your trustees to manage your investments by allocating funds for investments in a diversified portfolio. This may include stocks, bonds, shares or the buying of additional real estate.
Trustees can use professional advice and help in the management of your estate to increase its value and ensure it has long-term financial growth. This not only helps your beneficiaries gain the maximum benefit from your estate but also ensures all financial possibilities are explored to ensure their best interests.
Conclusion
Generally, trusts are always considered to be a great option for estate planning, but discretionary trusts are the preferred option if you own a fair share of properties.
You can customise your estate planning using a discretionary trust based on the potential needs of your beneficiaries. Due to its flexible structure, it’s also easier to make amends as you see fit and protect your assets from any beneficiary entitlement. We hope this article has given you a better idea about discretionary trusts and how they can be useful in planning your estate.
Also Read: Proven Ways to Access Capital for Immediate Business Needs
