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Discretionary Trusts in Wills Explained

· 35 min

Note: The following scenario is fictional and used for illustration.

David, 58, a successful business owner from Manchester, drafted his will leaving £800,000 equally between his three adult children. Six months later, his eldest son entered rehab for gambling addiction, accumulating £45,000 in debt. His daughter was going through a contentious divorce where her spouse was claiming half of all future inheritances. His youngest, 24, had never held a job for more than six months.

David rewrote his will using a discretionary trust instead. Rather than guaranteed inheritances, David appointed his brother and a trusted accountant as trustees with discretion to support his children based on their actual circumstances when he dies—not their situations today. The trust protects his son from his own financial mismanagement, shields his daughter's inheritance from divorce proceedings, and allows his youngest time to mature before receiving substantial assets.

According to HMRC statistics published in November 2024, 733,000 trusts were registered on the Trust Registration Service as of March 2024, with discretionary trusts representing a significant proportion used specifically for this kind of family protection.

This guide explains exactly how discretionary trusts work in UK wills, when they're worth the complexity, their tax implications under 2025 rules, and how to set one up correctly.

Table of Contents

What Is a Discretionary Trust in a Will?

A discretionary trust in a will is an arrangement where you leave assets to trustees who have complete discretion to decide which beneficiaries receive what, when, and how much from a defined class of potential beneficiaries. Unlike a direct bequest where someone automatically receives a specific amount, discretionary trust beneficiaries have no guaranteed entitlement—trustees make all decisions.

The structure involves three core components. You (the settlor) create the trust through your will, naming trustees who will manage the assets and defining a class of potential beneficiaries who could benefit. When you die, your specified assets transfer to the trustees, not to the beneficiaries directly.

No beneficiary has an automatic right to receive anything. Trustees exercise complete discretion based on each beneficiary's circumstances at the time distributions are made. This flexibility is the defining characteristic that distinguishes discretionary trusts from fixed trusts or direct gifts.

Consider this example: Emma names her three children as potential beneficiaries but gives trustees power to distribute based on actual need. One child might receive 80% if they're caring for disabled grandchildren, another might get 20% if they're financially secure, and the third might receive nothing if they're wealthy. The trustees adapt to real circumstances rather than following rigid percentages set years earlier.

Under the Trustee Act 2000, trustees have statutory powers to invest trust assets and a legal duty of care to act in beneficiaries' best interests. These trusts are created on death (testamentary trusts) and are governed by the will's terms combined with general trust law principles.

Discretionary trusts can last up to 125 years under UK perpetuity rules, though most are wound up much sooner when their purpose has been fulfilled—typically when vulnerable beneficiaries die, when all beneficiaries reach financial maturity, or when the family situation stabilizes.

The key distinction from direct gifts is control. "I leave £100,000 to my son" creates a direct gift with immediate entitlement. "I leave £100,000 to trustees for the benefit of my children" creates a trust where trustees decide if, when, and how much each child receives.

How Does a Discretionary Trust Work?

Your death triggers the trust. Assets you've specified in your will transfer to the trustees, not to the beneficiaries. Legal ownership passes to the trustees who manage everything on behalf of the beneficiary class.

You must appoint at least two trustees for most discretionary trusts, though three or four provides better continuity if one trustee dies or resigns. These trustees take legal title to the trust assets—they own the property, investments, or cash for the benefit of the beneficiaries.

The "class of beneficiaries" is a group of potential beneficiaries you define in your will. Common examples include "my children and grandchildren," "my descendants," or "my siblings and their children." This class can include people not yet born at the time you write your will, which provides valuable flexibility for future generations.

Trustees meet regularly to make distribution decisions. They consider each beneficiary's circumstances, needs, and financial maturity. One beneficiary might receive university tuition payments, another might get nothing because they're financially independent, and a third might receive monthly living expenses to support caring for young children.

You can leave a letter of wishes alongside your will—a non-binding document guiding trustees on your preferences. You might write: "I'd like education costs prioritized," or "Avoid distributions to Michael during any period of active addiction." While not legally enforceable, responsible trustees consider your wishes carefully when exercising discretion.

Distribution examples show the flexibility in practice. Trustees might pay private school fees for one grandchild, buy a car for another who needs transport to work, distribute income annually to supplement a beneficiary's pension, or hold back all distributions from someone going through bankruptcy until their financial situation stabilizes.

Here's how Sarah's discretionary trust worked for her four grandchildren (ages 3-15 when she died): Trustees paid private school fees for the eldest who showed academic promise, covered university tuition for the second who studied medicine, held back distributions for the third who struggled with alcohol addiction, and made monthly payments to support the youngest's single parent with childcare costs. Each received different amounts based on actual circumstances, not arbitrary percentages fixed in Sarah's will.

The trust continues until trustees decide to wind it up. This typically happens when the trust purpose has been fulfilled, all beneficiaries are financially mature and no longer need protection, or when continuing the trust no longer makes sense given changed circumstances.

Under the Trustee Act 2000, trustees must invest trust assets prudently, obtain proper investment advice where appropriate, and maintain the balance between income and capital growth to serve all beneficiaries fairly.

Discretionary Trust vs Fixed Trust: Key Differences

The fundamental distinction lies in beneficiary entitlement and trustee discretion. Here's a direct comparison:

Beneficiary Entitlement:

  • Discretionary Trust: No automatic rights; trustees decide everything
  • Fixed Trust: Fixed entitlement specified in trust deed (e.g., 50% to Sarah, 50% to David)

Flexibility:

  • Discretionary Trust: High—trustees adapt to changing needs over decades
  • Fixed Trust: Low—percentages or interests fixed at outset and cannot change

Beneficiary Rights:

  • Discretionary Trust: Can request consideration but cannot demand payment
  • Fixed Trust: Can enforce fixed entitlement in court; trustees must pay what's specified

Trustee Role:

  • Discretionary Trust: Active decision-making and ongoing discretion required
  • Fixed Trust: Administrative—simply pay out fixed amounts or manage fixed interests

Tax Treatment:

  • Discretionary Trust: Periodic 10-year charges, exit charges, income tax at 45%
  • Fixed Trust: Beneficiaries pay tax at their own rates; no periodic charges

Asset Protection:

  • Discretionary Trust: Strong—beneficiaries have no proprietary interest creditors can claim
  • Fixed Trust: Moderate—fixed interests can potentially be claimed by beneficiaries' creditors

Suitable For:

  • Discretionary Trust: Vulnerable beneficiaries, minors, uncertain futures, asset protection
  • Fixed Trust: Specific allocations, life interest arrangements, clear intended divisions

Consider this practical illustration. A fixed trust might state: "My estate to my wife for life, then 50-50 to my two daughters when she dies." The daughters know exactly what they'll inherit—half each. They can enforce this right.

A discretionary trust instead says: "My estate to trustees for the benefit of my children and grandchildren." The trustees decide who gets what based on circumstances when distributions are made. One child might receive 70%, another 30%, another nothing—or all might receive equal shares. It depends entirely on their needs, behavior, and circumstances at the time.

The tax differences are significant. According to HMRC guidance on trusts and inheritance tax, discretionary trusts (called "relevant property trusts") face periodic charges every 10 years and exit charges when assets leave the trust. Fixed trusts generally avoid these charges, with beneficiaries paying tax at their personal rates instead.

When Should You Use a Discretionary Trust in Your Will?

Discretionary trusts aren't right for everyone. They come with real costs and complexity. But for certain family situations, that complexity is worthwhile. Here are specific scenarios where discretionary trusts provide genuine value.

Protecting Vulnerable Beneficiaries

Adult children with addiction, mental health issues, or learning disabilities often need financial support but cannot safely manage large lump sums. Direct inheritance might be squandered, lost to exploitation, or trigger harmful behaviors.

Additionally, beneficiaries receiving means-tested benefits face strict asset limits—usually between £6,000 and £16,000. A direct inheritance would disqualify them from benefits without providing enough for lifetime care.

Michael's situation demonstrates this perfectly. His son has schizophrenia and receives disability benefits totaling £14,000 annually. A direct £200,000 inheritance would have disqualified him from all benefits, leaving him with the lump sum but no ongoing government support. The discretionary trust allows trustees to pay for holidays, specialist equipment, and therapy without affecting his benefit entitlement because he has no legal right to the trust assets.

Beneficiaries with Poor Financial Management

Some beneficiaries have demonstrated they're not ready for substantial assets. History of bankruptcy, county court judgments, reckless spending, or simply youth and immaturity suggests a lump sum would disappear quickly.

Emma's 25-year-old daughter had £30,000 in credit card debt and had never saved money. Rather than a £150,000 lump sum she'd likely spend within a year, Emma's discretionary trust allows trustees to release funds gradually—perhaps £10,000 annually—as her daughter demonstrates increasing financial responsibility. If she completes a debt management program and maintains savings for two years, trustees might increase distributions.

Asset Protection from Divorce and Creditors

When a beneficiary is going through divorce, inheritance received during the marriage can be included in the financial settlement. While inheritance isn't automatically split 50-50, family courts consider all assets when dividing matrimonial property.

A discretionary trust provides protection because the beneficiary has no fixed legal entitlement—they're merely a potential beneficiary in a class. Courts generally cannot force trustees to distribute assets or include discretionary trust interests in divorce settlements.

David's daughter was divorcing when he died. Her spouse's solicitor initially claimed half of her expected £250,000 inheritance. Because David had used a discretionary trust where his daughter had no guaranteed entitlement, the court excluded it from the divorce financial settlement. The trustees later distributed funds to her after the divorce finalized, protecting the full amount.

Similarly, if a beneficiary faces bankruptcy or creditor claims, assets held in a discretionary trust generally remain beyond creditors' reach because the beneficiary owns nothing—they have a mere hope of benefit, not a legal property right.

Flexibility for Changing Family Circumstances

You might have grandchildren not yet born when you write your will. Or your children's circumstances might change dramatically over 20-30 years. Equal division today might seem deeply unfair in future circumstances.

Sarah named "my descendants" as beneficiaries when she wrote her will. At that time, she had three children and two grandchildren. When she died 15 years later, she had three children and seven grandchildren. The trustees distributed assets among all ten based on actual circumstances: two grandchildren received substantial education support for university, one received ongoing care costs for disability, one received nothing because they'd inherited wealth from their other grandparent, and the rest received moderate amounts based on need.

Without the discretionary structure, Sarah would have needed to update her will every time a grandchild was born and constantly reassess appropriate percentages.

Business Succession Planning

Family business shares often work better in discretionary trusts when some children work in the business and others don't. Trustees can distribute based on involvement and contribution rather than rigid equal percentages that might be inappropriate.

When NOT to Use a Discretionary Trust

Honesty matters here. Discretionary trusts are overkill for most straightforward estates. Don't use them if:

  • Your beneficiaries are financially responsible adults who don't need protection
  • You want beneficiaries to receive assets immediately without trustee oversight
  • Tax efficiency is your only goal (other structures may work better)
  • You cannot find suitable trustees willing to take on long-term responsibility
  • Your estate is under £325,000 and circumstances are simple

For straightforward family situations, direct bequests or simpler trust structures accomplish your goals without unnecessary complexity and tax costs.

Who Can Be Trustees and What Are Their Powers?

Choosing the right trustees is crucial because they'll make all decisions about your beneficiaries' financial support, potentially for decades.

Who Can Be Trustees

You need at least two trustees for most discretionary trusts, though three to four provides better continuity. When one trustee dies or resigns, having additional trustees means the trust continues smoothly without court applications.

Trustees can be family members, friends, professional trustees (solicitors, accountants), or a combination. They must be over 18, mentally capable, and trustworthy. Financial literacy matters—they'll be managing investments and making complex decisions about distributions.

David appointed three trustees: his brother (who knows the family dynamics and each child's history), his accountant (who understands tax implications and investment strategies), and a solicitor friend (who understands legal compliance and trustee duties). This mix of family knowledge and professional expertise serves beneficiaries well.

Professional trustees typically charge fees—usually 1-2% of trust value annually. Family and friend trustees normally serve unpaid but can claim reasonable expenses. Your will can authorize trustee fees explicitly.

Trustee Powers Under the Trustee Act 2000 and Will Terms

The Trustee Act 2000 grants trustees statutory powers unless your will restricts them:

  • Power to invest trust assets using the general power of investment
  • Power to distribute income or capital to any beneficiary
  • Power to decide amounts and timing of all distributions
  • Power to appoint additional trustees or remove themselves
  • Power to seek professional advice (legal, tax, investment) at trust expense
  • Power to run businesses held in trust
  • Power to delay distributions indefinitely within the trust period

Well-drafted wills include even broader powers to handle unexpected situations.

Trustee Duties

Trustees must:

  • Act in beneficiaries' best interests at all times
  • Exercise discretion reasonably, fairly, and impartially among the beneficiary class
  • Avoid conflicts of interest between trustee role and personal interests
  • Keep proper accounts and detailed records of all decisions
  • Comply with tax filing requirements including the annual SA900 Trust Tax Return
  • Register the trust with HMRC's Trust Registration Service
  • Consider all beneficiaries' circumstances before making distribution decisions
  • Obtain investment advice where appropriate under the Trustee Act 2000

These aren't optional—they're legal obligations. Trustees who breach duties can be personally liable for losses.

Decision-Making Process

Trustees must meet regularly to review the trust. Many trusts specify quarterly or annual meetings. Decisions are typically made collectively—either by majority vote or unanimous agreement depending on the trust deed.

Crucially, trustees must keep written records documenting the rationale for each significant decision. This protects them if beneficiaries later challenge decisions and demonstrates they considered all relevant factors.

Trustees can consult your letter of wishes but aren't bound by it. The letter guides their thinking but doesn't override their legal duty to consider current circumstances and exercise independent judgment.

Beneficiaries cannot override trustee decisions. Even if all beneficiaries want a particular distribution, trustees must independently assess whether it's appropriate.

Practical Trustee Decision-Making Example

The trustees of Emma's discretionary trust met quarterly. In one meeting, they reviewed three beneficiary requests:

First, daughter Sarah requested £50,000 for a house deposit. The trustees approved this because Sarah was financially stable, had saved £30,000 herself, and the house purchase would improve her long-term security.

Second, son Michael requested £80,000 to pay gambling debts. The trustees denied this request because paying the debts wouldn't address Michael's underlying addiction. Instead, they offered to pay for residential addiction treatment and agreed to reconsider financial support after 12 months of demonstrated recovery.

Third, granddaughter aged 18 requested £10,000 for university costs. The trustees approved this with payments made directly to the university rather than to the granddaughter, ensuring funds were used for their intended purpose.

Minutes documented each decision's rationale, the factors considered, and why the trustees believed their decision served the beneficiaries' best interests.

What Rights Do Discretionary Trust Beneficiaries Have?

The core principle is stark: discretionary beneficiaries have no automatic right to receive anything from the trust. This distinguishes them fundamentally from beneficiaries of fixed trusts who hold enforceable legal entitlements.

What Beneficiaries CAN Do

Beneficiaries can request that trustees consider their circumstances. They can explain their needs, provide financial information, and ask trustees to make distributions. But they cannot demand trustees agree.

Beneficiaries can ask for information about the trust's existence and general terms. Courts have recognized that beneficiaries need some information to hold trustees accountable.

Under the principles established in Schmidt v Rosewood Trust Ltd [2003] UKPC 26, beneficiaries can request trust accounts. Trustees have discretion whether to provide them, but courts can order disclosure where necessary for proper accountability.

If trustees breach their fiduciary duties—for example, by acting dishonestly, ignoring beneficiaries entirely, or making decisions for improper purposes—beneficiaries can apply to court to remove trustees or challenge decisions.

What Beneficiaries CANNOT Do

Beneficiaries cannot demand distributions. Even if they have urgent needs or believe they deserve support, only trustees decide whether to distribute.

They cannot force trustees to exercise discretion in their favor. A beneficiary might argue persuasively for distribution, but the final decision rests entirely with trustees.

Beneficiaries cannot override trustee decisions. Even if all beneficiaries agree they want something different from what trustees decided, trustees must exercise independent judgment.

They cannot challenge trustee decisions simply because they disagree with the outcome. Courts will only intervene if trustees acted improperly—not merely because beneficiaries think a different decision would have been better.

Key Case Law: Schmidt v Rosewood Trust Ltd [2003]

This Privy Council case established important principles about beneficiary rights to information. The court held that beneficiaries have a right to request information and that courts have discretion to order disclosure where needed to hold trustees accountable.

However, beneficiaries must show "legitimate interest" and "real chance of benefiting" from the trust. Trustees can refuse requests they consider unreasonable or where disclosure might harm trust administration.

Protected Information Trustees Can Withhold

Trustees generally don't have to disclose:

  • Letters of wishes (these guide trustees but remain private)
  • Detailed reasoning for why they made specific distribution decisions (only that they considered all relevant factors)
  • Legal advice they've received (subject to legal professional privilege)

This protects trustees' ability to make difficult decisions without constant second-guessing.

Practical Reality in Well-Run Trusts

Despite limited legal rights, well-run trusts keep beneficiaries reasonably informed. Trustees might provide annual summaries of trust assets, explanations of distribution policies, and regular opportunities for beneficiaries to discuss their circumstances.

Transparency reduces disputes and helps beneficiaries understand trustee thinking. While trustees can keep information private, choosing to share appropriate information voluntarily often prevents legal challenges.

Scenario Illustrating Beneficiary Limitations

David was a beneficiary of his late mother's discretionary trust alongside his two siblings. Over 10 years, his brother received £120,000 in total distributions for his disabled daughter's care costs. His sister received £115,000 to cover significant medical expenses not covered by the NHS. David received nothing.

David challenged the trustees, claiming unfair treatment. He argued equal treatment required equal distributions.

The court ruled that trustees acted properly. David was financially wealthy with a successful business, while his siblings faced genuine hardship. Trustees' duty was not equal treatment but appropriate exercise of discretion based on actual need. David had no right to equal distributions—his siblings' greater need justified the disparity.

The case was dismissed. David paid his own legal costs and the trustees' legal costs were paid from the trust, slightly reducing the assets available for all beneficiaries.

Tax Implications of Discretionary Trusts in 2025

Discretionary trusts face notably unfavorable tax treatment compared to direct bequests or fixed trusts. Understanding these costs is essential before deciding whether discretionary trust benefits justify the tax burden.

Why Discretionary Trusts Have Unfavorable Tax Treatment

Discretionary trusts are classified as "relevant property trusts" under the Inheritance Tax Act 1984. HMRC treats them as vehicles that could potentially avoid tax across generations, so a special tax regime applies with periodic charges designed to collect tax roughly equivalent to what would be paid if assets passed to individuals.

The assumption is that trusts could last for many decades, with wealth accumulating tax-free while direct bequests would trigger inheritance tax at each generation. The 10-year periodic charge is HMRC's mechanism to extract tax periodically.

Entry Charge When Assets Transfer to Trust on Death

When you die, your estate pays inheritance tax before assets transfer to the discretionary trust if your total estate exceeds the nil-rate band.

For 2025/26, the inheritance tax nil-rate band remains £325,000. Assets within this threshold pass tax-free. Assets above are taxed at 40%.

The critical point: if you leave your main residence to a discretionary trust, you lose the residence nil-rate band (RNRB). The RNRB of £175,000 only applies when your home passes directly to direct descendants (children, grandchildren), not to discretionary trusts.

Consider Sarah's situation. Her estate is worth £500,000 including her £300,000 home. If she leaves her home directly to her children: £325,000 nil-rate band + £175,000 RNRB = £500,000 passes tax-free. No tax due.

If she leaves the same home to a discretionary trust for her children: only the £325,000 nil-rate band applies (no RNRB for discretionary trusts). The remaining £175,000 is taxed at 40% = £70,000 inheritance tax due before assets even reach the trust.

This RNRB loss alone often makes discretionary trusts inappropriate for estates where the main residence represents substantial value.

Ten-Year Periodic Charge

Every 10 years from the trust's creation, HMRC charges inheritance tax on the trust's value. The maximum rate is 6% of assets exceeding £325,000.

The actual rate depends on the calculation methodology, which considers the trust value, available nil-rate band, and previous chargeable transfers. Most trusts pay an effective rate between 0% and 6%.

Worked example: A trust holds £500,000 at the 10-year anniversary. Taxable amount: £500,000 - £325,000 = £175,000. Assuming an effective rate of 3%, the tax due is £175,000 × 3% = £5,250.

This charge is due every 10 years. Over 30 years, the trust might pay three periodic charges, significantly eroding capital.

Payment is due within six months of each anniversary.

Exit Charge When Assets Leave the Trust

When trustees distribute assets to beneficiaries, an exit charge may apply. This is calculated as a proportion of the 10-year charge based on how long assets were held in the trust since the last periodic charge.

Example: If a trust distributes £100,000 to a beneficiary five years after creation (before the first 10-year anniversary), the exit charge is calculated based on the time held and the theoretical 10-year charge rate.

Exit charges are complex to calculate and require professional tax advice.

Income Tax on Trust Income

Trustees pay income tax on trust income at punitive rates. According to GOV.UK guidance on trusts and income tax:

  • 45% on non-dividend income (rent, interest, other income) above £500
  • 39.75% on dividend income above £500
  • First £500 of income taxed at 0% (standard rate band)
  • No personal allowance for trusts

Compare this to individuals who have a £12,570 personal allowance and pay 20% basic rate on income up to £50,270.

Example: A trust receives £10,000 rental income annually. Tax calculation: (£10,000 - £500) × 45% = £4,275 tax due. An individual receiving the same income might pay £0 tax (if within personal allowance) or 20% = £1,500 maximum at basic rate.

From 2027/28, trust income tax rates on property and savings income will increase to 47%, making discretionary trusts even more tax-inefficient.

Capital Gains Tax

Trusts have an annual exempt amount of just £3,000 for 2025/26 (half the individual exemption of £6,000). Gains above this are taxed at 18% for residential property or 24% for other assets.

Tax Planning Considerations

The tax costs are substantial. For estates over £325,000, you should:

  • Model tax costs over the expected trust duration (often 20-30 years)
  • Consider whether alternative structures (life interest trusts, absolute gifts with conditions) achieve similar goals with better tax treatment
  • Evaluate whether protection benefits justify paying 10-year charges plus 45% income tax
  • Explore Section 144 appointments within two years of death, which can avoid some charges

Professional tax advice is essential. The tax rules are complex, and mistakes can result in unexpected liabilities.

Common Mistakes When Setting Up a Discretionary Trust

Discretionary trusts require precise drafting. Small errors can have serious consequences—from trust failure to unexpected tax charges to family disputes. Here are the most frequent mistakes.

Vague Beneficiary Class Definition

Your beneficiary class must be defined with certainty. Under the test established in McPhail v Doulton [1971] AC 424, it must be possible to say with certainty whether any given person is or is not a member of the class.

"My family" is too vague. Who counts as family? Spouses of children? Cousins? Former spouses? The trust fails if beneficiaries can't be identified with certainty.

"My children, grandchildren, and great-grandchildren" is specific and certain. Anyone can determine whether they fall within this definition.

Be specific. Use precise terms: "my descendants," "my children and remoter issue," or "my siblings and their descendants."

No Default Clause

What happens if the trust ends and assets remain? Without a default clause, leftover assets could fall back into your estate and pass according to intestacy rules—potentially to unintended recipients.

Include a default clause: "If this trust ends and assets remain, the remaining assets shall pass to [named charity]" or "shall be distributed equally among my then-living children."

Poor Trustee Selection

Common mistakes include appointing only one trustee (risky—what if they die?), choosing people who will conflict with each other, selecting people without financial skills, or appointing beneficiaries as trustees (creates conflicts of interest).

Appoint three to four trustees. Mix family members who know beneficiary circumstances with professionals who understand law and tax. Ensure all trustees are willing and capable of serving for potentially decades.

Inadequate Trustee Powers

Generic trust templates may not give trustees enough flexibility. If your trust deed doesn't grant powers to invest in certain assets, run businesses, or distribute capital, trustees may need court permission for sensible actions—expensive and time-consuming.

Ensure your trust deed includes comprehensive powers to invest broadly, distribute both income and capital, seek professional advice at trust expense, delegate certain functions, and adapt to changing circumstances.

Ignoring Tax Consequences

Many people create discretionary trusts without modeling long-term tax costs. They discover too late that 10-year charges plus 45% income tax plus loss of residence nil-rate band will erode 30-40% of trust value over 20 years.

Before committing to a discretionary trust, calculate:

  • Entry charge (loss of RNRB if home is involved)
  • Three or four 10-year periodic charges over expected trust duration
  • Annual income tax at 45% on investment returns
  • Exit charges when assets distribute to beneficiaries

Compare these costs to alternative structures. Sometimes simpler solutions achieve the same protection at lower tax cost.

DIY Trust Using Online Templates

Generic online templates miss crucial clauses for your specific circumstances. They may fail HMRC compliance requirements, lack proper default clauses, or use outdated language that doesn't match current tax legislation.

Professional legal drafting costs £500-£1,500+ but protects against expensive errors. A poorly drafted trust might cost beneficiaries tens of thousands in unnecessary tax or legal fees to fix problems.

No Letter of Wishes

Without guidance, trustees make distribution decisions without understanding your intentions. While letters of wishes aren't binding, they provide invaluable context about each beneficiary, your concerns, and your priorities.

Write a detailed letter explaining why you're using a discretionary trust, each beneficiary's circumstances and your concerns about them, and what you hope trustees will prioritize (education, housing, healthcare, financial independence).

Update the letter when circumstances change—it's not part of your will, so you can revise it any time without formal will amendments.

Single Beneficiary with No Power to Add Others

A trust with only one beneficiary and no power for trustees to add more isn't truly discretionary for tax purposes. HMRC may treat it as a bare trust or interest in possession trust with different (potentially worse) tax consequences.

Define a wide beneficiary class or include power for trustees to add beneficiaries if appropriate.

Prevention Checklist

Before finalizing a discretionary trust:

  • ✓ Seek professional legal advice for drafting
  • ✓ Define beneficiary class precisely using certain terms
  • ✓ Include comprehensive default clause
  • ✓ Appoint minimum three trustees with complementary skills
  • ✓ Model tax costs over expected trust duration (typically 20-30 years)
  • ✓ Draft detailed letter of wishes
  • ✓ Review trust terms every five years as circumstances change

How to Set Up a Discretionary Trust in Your Will

Creating a discretionary trust requires careful planning and, usually, professional help. Here's the step-by-step process.

Step 1: Decide If Discretionary Trust Is Right for You

Review the scenarios in the earlier section. Do your circumstances match situations where discretionary trusts add value? If your beneficiaries are financially responsible adults and your estate is straightforward, simpler alternatives may serve you better.

Consider whether the tax costs and administrative complexity justify the protection and flexibility benefits. For estates under £325,000 with straightforward needs, the answer is often no.

Step 2: Choose Your Trustees

Identify three to four people who are trustworthy, financially literate, and willing to serve. The ideal mix combines people who know your family with those who have professional expertise.

Discuss the role with potential trustees before appointing them. Ensure they understand the commitment—potentially 10-20+ years of active decision-making, regular meetings, tax compliance, and mediating between beneficiaries with competing needs.

Ask directly: "Would you be willing to serve as trustee of my discretionary trust? The role involves meeting quarterly to make distribution decisions about my children's inheritance based on their circumstances at the time. You'd work with [names of other trustees]. The trust could last 20+ years."

Gauge their genuine willingness. Reluctant trustees won't serve your beneficiaries well.

Step 3: Define Your Beneficiary Class

Be specific about who's included. Common formulations:

  • "My children and remoter issue" (includes children, grandchildren, great-grandchildren)
  • "My descendants" (same as above)
  • "My children, grandchildren, and great-grandchildren" (more specific)
  • "My siblings and their descendants" (includes nieces, nephews, and their children)

Consider whether you want trustees to have power to add beneficiaries—for example, to include a future spouse or stepchildren. This increases flexibility but also broadens who might benefit.

Step 4: Draft Your Letter of Wishes

Write a detailed, honest letter to your trustees explaining:

  • Why you're using a discretionary trust instead of direct bequests
  • Each beneficiary's circumstances and your specific concerns about them
  • What you hope trustees will prioritize (education support, housing, healthcare, business opportunities)
  • Any specific requests like "avoid distributions during active addiction" or "prioritize university education for grandchildren"

Remember this letter is non-binding guidance, not legal instructions. Trustees will consider it carefully but must exercise independent judgment based on circumstances when they make decisions.

Update your letter when circumstances change—perhaps annually as part of reviewing your overall estate plan. The letter isn't part of your will, so you can revise it any time without solicitor involvement or formal will amendments.

Step 5: Get Professional Legal Advice

Discretionary trusts are complex legal structures with significant tax implications. Professional drafting is essential to ensure:

  • Beneficiary class definition satisfies legal certainty requirements
  • Trustee powers are comprehensive enough for all foreseeable situations
  • Default clauses protect against unintended distributions
  • Trust terms comply with current HMRC requirements
  • Language reflects current tax legislation and case law

A solicitor will draft the trust provisions within your will, typically as a separate schedule or section. Expect to pay £500-£1,500+ depending on trust complexity, estate value, and your location.

This investment protects against costly mistakes. A poorly drafted DIY discretionary trust might cost beneficiaries tens of thousands in unnecessary tax, legal fees to fix errors, or even complete trust failure.

Step 6: Execute Your Will Properly

Once your will including discretionary trust provisions is drafted:

  • Sign it in the presence of two independent adult witnesses
  • Ensure witnesses watch you sign and then sign themselves
  • Don't use beneficiaries or their spouses as witnesses (this invalidates their gifts)
  • Store your will safely and inform trustees where to find it
  • Give trustees a copy of your letter of wishes (separate from will)

Your will creates the trust on your death. Until then, the trust doesn't exist—it's just instructions waiting to take effect.

Step 7: Review Regularly

Review your will and letter of wishes every five years or when circumstances change significantly:

  • Birth of grandchildren (are they included in beneficiary class?)
  • Beneficiary circumstances changing (recovery from addiction, divorce finalized, financial maturity achieved)
  • Trustee deaths or unwillingness to continue serving
  • Tax law changes affecting discretionary trusts
  • Your own changing priorities and wishes

Update your letter of wishes as needed. Consider whether the discretionary trust still serves its purpose or whether circumstances have changed enough to warrant a different structure.

When You Might NOT Need a Solicitor

For very simple protective trusts—perhaps holding £50,000 for a single vulnerable beneficiary until they reach 25—some online will services offer basic trust provisions.

However, for estates over £325,000, complex family circumstances, multiple beneficiaries, business assets, or property, professional advice is essential.

WUHLD's Role

WUHLD's online will service is designed for straightforward wills without complex trust structures. For discretionary trusts requiring expert legal drafting and tax planning, we recommend professional solicitor advice.

If your estate needs a basic will structure combined with discretionary trust provisions, you might use WUHLD for the foundation will, then engage a solicitor to add and review the trust clauses. This hybrid approach can be more cost-effective than a full bespoke solicitor will.

Checklist Before Finalizing

Before completing your discretionary trust will, confirm:

  • ✓ Trustees identified and have agreed to serve
  • ✓ Beneficiary class clearly and precisely defined
  • ✓ Trustee powers are comprehensive and flexible
  • ✓ Default clause included for remaining assets if trust ends
  • ✓ Letter of wishes drafted explaining your intentions
  • ✓ Tax implications modeled over expected trust duration
  • ✓ Professional legal review completed (especially if estate over £325,000)
  • ✓ Will properly executed with two independent witnesses
  • ✓ Trustees informed of will location and given letter of wishes

Frequently Asked Questions

Q: What is a discretionary trust in a will?

A: A discretionary trust in a will is an arrangement where you leave assets to trustees who have complete discretion to decide which beneficiaries receive what, when, and how much from a defined class of potential beneficiaries. Unlike fixed trusts where beneficiaries have guaranteed entitlements, discretionary trust beneficiaries have no automatic right to assets—the trustees make all distribution decisions based on beneficiaries' changing needs and circumstances.

Q: What are the disadvantages of a discretionary trust in a will?

A: The main disadvantages are unfavorable tax treatment (periodic 10-year charges up to 6%, exit charges when assets leave the trust, and income taxed at 45%), loss of the residence nil-rate band if your home goes into the trust, administrative complexity requiring trustee meetings and record-keeping, and potential for trustee disagreements or poor decisions that beneficiaries cannot easily challenge.

Q: Who pays tax on a discretionary trust?

A: The trustees pay tax on income and gains within the trust. Discretionary trusts pay income tax at 45% on non-dividend income and 39.75% on dividends (with a £500 allowance). They also face inheritance tax charges: a 10-year periodic charge (up to 6% of assets over £325,000) and exit charges when assets are distributed to beneficiaries.

Q: Can discretionary trust beneficiaries demand money?

A: No. Discretionary trust beneficiaries have no legal right to demand distributions. Under UK trust law, only trustees decide if, when, and how much to distribute. Beneficiaries can request information about the trust and ask trustees to consider their needs, but cannot compel trustees to pay them unless trustees have breached their fiduciary duties.

Q: How long can a discretionary trust in a will last?

A: A discretionary trust created in a will can last for up to 125 years from the date of death under UK law. However, most discretionary trusts are wound up much sooner—typically when the primary beneficiary (such as a vulnerable person) dies, when all beneficiaries reach financial maturity, or when the trust purpose has been fulfilled.

Q: What is the difference between a discretionary trust and a fixed trust?

A: In a fixed trust, beneficiaries have guaranteed entitlements specified in the trust deed (e.g., 'Sarah receives 40%, David receives 60%'). In a discretionary trust, trustees decide everything—who benefits, when they receive assets, and how much they get. Fixed trust beneficiaries can enforce their rights; discretionary trust beneficiaries cannot.

Q: Do I need a solicitor to set up a discretionary trust in my will?

A: While not legally required, professional legal advice is strongly recommended. Discretionary trusts have complex tax implications, require precise drafting to avoid HMRC compliance issues, and need carefully worded trustee powers and default clauses. Mistakes in DIY discretionary trust wills can result in unintended tax charges, beneficiary disputes, or the trust failing entirely.

Conclusion

Key takeaways:

  • Discretionary trusts give your trustees complete control over who receives what from your estate and when, offering unmatched flexibility for families with vulnerable members, unpredictable futures, or beneficiaries who aren't ready for lump sum inheritances
  • The main trade-off is tax efficiency—discretionary trusts face periodic 10-year charges (up to 6%), loss of the residence nil-rate band, and income tax at 45%, making them expensive tools that should only be used when the protection and flexibility justify the costs
  • Choose three to four trustees carefully, mixing people who understand your family dynamics with those who have financial and legal expertise, and ensure they're willing to commit to potentially decades of active decision-making
  • Professional legal advice is essential for proper drafting—DIY discretionary trust wills risk costly errors like vague beneficiary definitions, missing default clauses, or inadequate trustee powers that undermine the entire structure

Understanding discretionary trusts empowers you to make an informed choice about whether this powerful but complex tool fits your family's needs. The flexibility to adapt your estate plan to circumstances you can't predict today offers genuine peace of mind, but only if you weigh that benefit against the real tax costs and administrative complexity. Whatever you decide, the important thing is ensuring your will reflects your actual wishes and protects the people you care about most.

Need Help with Your Will?

Understanding discretionary trusts helps you recognize when complex trust structures are necessary versus when simpler will provisions achieve your goals. For most straightforward estates with financially capable beneficiaries, the tax costs and complexity of discretionary trusts aren't justified.

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Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.

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