What Is a Discretionary Trust Will?
A discretionary trust will1 is a type of testamentary instrument that enables the grantor, or person who creates it, to bequeath assets to other entities while retaining control over them for their entire lifetime trust.
In general, this means that you can designate which beneficiaries get what and when those items are distributed as long as they live.
This may seem like an unusual idea, but before one dismisses it outright, there are many benefits of using such a plan, both for those distributing the assets and those receiving them upon distribution.
The main advantage associated with these types of plans is protection against creditors.
Let me explain,
Suppose someone has unpaid bills from medical expenses, credit cards balances, or mortgages. In that case, he/she could run into financial trouble at any point in time because debts are not forgiven in bankruptcy.
However, these types of debts are often excluded when dealing with assets bequeathed under this type of plan. Creditors cannot go after property that is owned by the person or entity to whom it was willed because they did not pay for it themselves; instead, an independent party paid for the trust asset and put restrictions on who can use it and how long until the potential beneficiary has complete control over its disposition -even if he/she owes debts.
Advantages of Discretionary Trusts
The several advantages of discretionary trusts are as follows:
Let’s take a look,
- It lets heirs decide how someone’s property is dealt with.
- The amount of current income can be adjusted to suit needs.
- There are no limits on what the grantor or beneficiaries may do in using, transferring and disposing of assets during their lifetime.
A discretionary trust also has advantages over a will because it provides more flexibility than other types of plans; this plan also ensures that money earned by investments goes directly into the estate account rather than being taxed before entering an inheritance pot.
Lastly, funds from a discretionary trust typically continue to grow upon receipt without spending all capital gains now, so they will have even more stake when distributions begin later down the line.
Discretionary Trusts Disadvantages
There are some disadvantages to discretionary trusts.
One disadvantage is that the assets in this type of trust are not insured by a federal guarantor such as the FDIC2.
Also, despite all advantages listed above, many people would prefer their money go towards charity before it goes to family members because they don’t want anyone profiting from their death and illness or injury.
Lastly, another potential issue with discretionary trusts is that beneficiaries have discretion over how trust fund should be invested, which can undermine long-term growth for some families if investments aren’t managed wisely.
Therefore, although Discretionary Trusts sound like solid plans on paper due to their flexibility and tax benefits, individuals need to weigh whether these factors outweigh other considerations.
Why Do I Need a Discretionary Will Trust?
Discretionary trusts are primarily used to distribute assets in a way that reduces the risk of paying hefty estate taxes.
This, combined with their ability to be changed at any time, means individuals can avoid having certain people inherit portions of an inheritance while also adjusting distribution when needed without causing some beneficiaries undue hardship and/or unforeseen tax burdens
By setting up one or more discretionary trust(s) before death, you ensure your family will have access to the funds they need for future investments and expenses even after your passing, as well as other benefits such as avoiding probate fees – all while keeping them free from disputes over how money should be distributed among beneficiaries who fall on different financial levels.
Discretionary Trust Will IHT Implications
Trusts made as part of a Will are subject to inheritance tax, which can be avoided with a Discretionary Trust
As this kind of trust is not classified as part of the estate and has no beneficiaries named in it, inheritance tax needn’t be paid on any money left there by the person who set up the trust.
In other words,
If an individual sets up one or more discretionary trusts before death, he or she will avoid having certain people inherit portions of their inheritance while also being able to adjust distribution when needed without causing some beneficiaries undue hardship and unforeseen taxes. This type of arrangement may provide for lower (or zero) IHT liabilities than would otherwise apply under current law at such time that legislation changes.
Where Can I Go For Further Help on Discretionary Trust Wills?
You can get help from a solicitor or an accountant who is familiar with this type of arrangement. A solicitor can advise on all aspects of inheritance tax planning liabilities. At the same time, accountants may take care of more day-to-day requirements such as managing trust bank accounts.
Taxation of Discretionary Trusts
The IHT3 liability for a discretionary trust depends on the type of income it generates. Income arising from capital assets (such as an existing portfolio of shares in a company) is usually free from inheritance tax. While such assets are subject to Capital Gains Tax when sold, this does not apply where someone dies and leaves them directly to their beneficiaries.
But if any part of the beneficiary’s interest in the trust property is disposed of during his lifetime-for example, by selling some shares-the gain may be liable to CGT even though he has only held that share through what would typically have been regarded as one person holding two separate interests at law.
A detailed analysis will need to be conducted into whether there is sufficient income to trigger the CGT liability and, if not, whether there are any other assets that should be included in an estate.
This is why those with considerable wealth need to have an excellent professional financial adviser to minimize inheritance tax liabilities.
Discretionary Trust Rules
Certain trusts-such as a Discretionary Trust Will can provide additional protection from Inheritance Tax by ensuring that all of the beneficiary’s interest in the trust property or income arising from capital assets (like shares) goes directly into trust on death so that no part of his/her share would ever form part of his/her estate at all.
Discretionary Trust Rules can be tailored to meet an individual’s wishes and objectives. They can provide for the distribution of assets to beneficiaries in ways that may differ from what would happen if an individual were still alive.
What does this mean?
This means that a person doesn’t need to worry about how his/her estate will eventually end up because he/she has already decided who should get which assets and when they should receive them.
Discretionary Trust Rules are typically set up so that distributions occur over time rather than all at once; this could allow a potential beneficiary more freedom with their money while also ensuring some long-term stability for beneficiaries who might not yet have developed enough financial skills or experience to manage large sums immediately upon receipt responsibly.
The benefit of a Discretionary Trust is that the person who created it can decide how to distribute his/her assets as well as when they are distributed and for what purpose; this can help alleviate some worries about leaving heirs with too much money or not enough skills necessary to manage their inheritance responsibly.
Discretionary Trust Entry Charge
The entry charge for a Discretionary Trust is typically the value of assets that are put into it.
It is worth noting, however, that there may be more than one way to go about doing this:
- The entry charge could be the entire amount transferred from an estate, including both tangible and intangible assets; or
- It can come only in cash equivalents (like stocks and bonds) and not in the form of tangible or intangible assets.
Sometimes, there are other fees associated with a Discretionary Trust. They can come from:
- setting up and maintaining the trust;
- paying income tax generated by it either when it is first made (if applicable) or periodically after that; or
- Making distributions to beneficiaries as dictated by its terms. These may also be taxable events.
Once established. However, these ongoing costs should be much lower than those that would accompany setting up an estate plan without using a trust instrument because they don’t have to deal with probate filings along the way – which means no court involvement for proving testamentary intent and distribution of property among heirs.” This could prove advantageous to those who are looking to avoid potential court proceedings and the associated costs.
How does a discretionary will trust work?
A discretionary will trust is an agreement between two or more parties (trustees) to invest funds and use them in the way you’ve agreed.
The trustees of a discretionary will trust it may be able, for example, to decide on which investments their money should go into and how much risk they want it to take; what proportion of income it can keep versus spending each year; whether any assets need to be sold if there isn’t enough cash coming in to meet its obligations over time.
Are discretionary trusts a good idea?
It’s a good idea if you want to influence how your assets are used heavily. A discretionary trust still gives beneficiaries access to the money, but it can impose conditions on that use of funds.
What happens to a discretionary trust when you die?
The trustee can only control the assets while you are alive. When you die, any remaining funds go to your beneficiaries as dictated in your will.
How much does it cost to set up a discretionary trust?
The costs of establishing a trust vary widely depending on the complexity of the needs. But typically, they are in the range of $500-$1000.
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