Discretionary trusts arise when a Settlor (the person who creates the trust) passes assets, cash or property to another person, known as the Trustee, to hold and manage for the benefit of a third person, known as the Beneficiary.
The beneficiary has no interest in the trust fund for legal or tax purposes until such time as the trustee, at their discretion, distribute either trust income or capital to them.
Discretionary trusts differ from life interest trusts, bare trusts and fixed trusts in that the beneficiary has no automatic right of entitlement to the trust assets. They only have the right to be considered for a distribution from the trust, which is at the discretion of the trustees.
Settlors are increasingly mindful of the flexibility and peace of mind offered by a discretionary trust. They are of particular interest to people who want to protect the interests of vulnerable dependants, such as minor children or those with disabilities.
Discretionary trusts should also be considered by anyone who is concerned that their assets may be squandered by spendthrift family members, those with addictions or where the beneficiaries are unable to manage their own affairs, due to disability. Discretionary trusts provide flexibility in deciding how the trust income and/or capital is distributed to the beneficiaries.
- Discretionary Trusts For Children With Special Needs
- The Importance of Appointing Suitable Trustees
- Settlors & Transferring Value To A New Zealand Trust
- The Importance of Effective Decision Making for Trustees
The use of a discretionary trust does not avoid the requirement to pay taxes. Where assets are transferred to a trust after the death of the Settlor, they can be transferred free of capital gains tax and stamp duty, which is not the case if the same assets are transferred to a trust before the death of the Settlor.
In the event that an asset is sold out of a trust, capital gains tax will arise if the asset has appreciated in value from the time the trust acquired it and disposes of it. Assets distributed to beneficiaries are classed as a capital distribution and therefore liable to capital acquisitions tax, with the benefit of utilising remaining tax-free thresholds.
Trustees are liable to account for income tax at 20% on income accruing to the trust, and if not distributed to the beneficiaries within eighteen months of the period in which it arose, will attract a further 20% surcharge.
Discretionary trust tax consists of a once-off initial charge of 6% of the value of the trust assets and is payable on the later of the death of the Settlor, or when the youngest beneficiary reaches the age of twenty-one years. Following the initial charge, a 1% charge is applied against the value of the trust each year thereafter that the trust remains in existence. Where a discretionary trust is set up to protect a vulnerable beneficiary, such as a disabled child, an application can be made to Revenue for an exemption, and which needs to be supported by medical evidence.
How Pearse Trust Can Help
Pearse Trust employs a team of dedicated professionals with experience in sitting up and administering discretionary trusts. We will work with you to make the trust setup process as smooth as possible.
We act in an advisory capacity, helping clients choose individuals who are best qualified to act as trustees. If your client feels they cannot rely on anyone in their circle to be a trustee, Pearse Trust provides a trustee service, with the advantage that we are independent, impartial and experienced.
Pearse Trust can assist in the drafting of a Letter of Wishes which gives non-binding guidance to their trustees in administering the trust. Once the trust deed has been drawn up and signed, asset’s are transferred to the trust, and then legally belong to the trustee, who holds them for the benefit of the beneficiaries. It is important to understand that assets transferred to a trust no longer belong to the Settlor, and they have no further recourse to them.
Working with Pearse Trust, you will have a highly qualified team of experts at your disposal. Our team includes solicitors, accountants and chartered secretaries. Our trust professionals are members of the Society of Trust and Estate Practitioners, a professional body which offers education, training and representation to senior trust professionals.
By partnering with Pearse Trust you can provide your clients with the peace of mind that their assets will be safeguarded for future generations. We will work with you to represent your clients’ best interests and to reassure them that their loved ones will be looked after following their passing.
Disclaimer: The blog does not represent taxation or legal advice and that independent advice should always be sought in respect of such matters etc.