What is a Discretionary Trust?
A Discretionary Trust (sometimes called a Flexible Trust) is a legal arrangement where you place assets into a trust for the benefit of a group of potential beneficiaries, but you don't specify exactly who gets what or when. Instead, you appoint trustees and give them complete discretion to decide how to distribute the trust assets among the beneficiaries based on their needs and circumstances at the time.
Unlike a fixed trust where "John gets the house and Sarah gets the investments," a discretionary trust says "the trustees may distribute among my children and grandchildren as they see fit." The trustees consider each beneficiary's financial situation, life circumstances, and needs before making distribution decisions.
You guide the trustees by including a "Letter of Wishes" (a non-binding document explaining your intentions and values), but the trustees aren't legally bound by it. This flexibility is the trust's greatest strength — trustees can adapt distributions to circumstances that didn't exist when you made your will, ensuring your wealth helps those who need it most when they need it.
The problem with fixed inheritance
- •Life circumstances change dramatically after you make your will
- •One child may become successful while another struggles
- •Beneficiaries might face divorce, bankruptcy, or addiction issues
- •Fixed shares can cause family conflict and resentment
- •Direct inheritance may be claimed by creditors or ex-spouses
The flexible solution
- Trustees adapt distributions to beneficiaries' actual needs
- Protects assets from divorces, creditors, and bankruptcy
- Can support vulnerable beneficiaries without direct ownership
- Trustees can refuse distributions if beneficiary is at risk
- Future-proofs your estate plan against unknowable changes
Who should consider a Discretionary Trust?
Complex family situations
Second marriages, step-children, estranged family members, or beneficiaries with vastly different needs and circumstances.
Asset protection concerns
Where beneficiaries face divorce risk, have creditor problems, poor financial management, or substance abuse issues.
Uncertain futures
When beneficiaries are young, their future success unknown, or you want to reward positive life choices and responsible behavior.
Generational wealth
For multi-generational planning where you want trustees to support children, grandchildren, and future generations flexibly.
How trustee discretion provides flexibility
Trustees can make decisions based on real-time circumstances:
Distribution timing
- Delay distributions if beneficiary is going through divorce
- Provide immediate funds for emergencies (medical, housing)
- Hold funds until beneficiary demonstrates financial maturity
Distribution amounts
- Give more to a struggling child, less to one who's wealthy
- Provide educational support for grandchildren as needed
- Adjust for inflation and changing living costs over time
Distribution form
- Pay university fees directly rather than giving cash
- Purchase property in trust rather than outright gift
- Provide income stream instead of lump sum
Beneficiary selection
- Include future-born grandchildren automatically
- Exclude beneficiaries who treat trustees unreasonably
- Add or remove beneficiaries as family circumstances change
Letter of Wishes
While trustees have full legal discretion, most people include a Letter of Wishes — a private document explaining your values, intentions, and hopes for how trustees should exercise their powers. This guides trustees without legally binding them, allowing them to apply your principles to unforeseen situations.
Tax considerations and the Relevant Property Regime
This is general information only. Tax treatment is complex and depends on individual circumstances. We provide tailored advice during your consultation.
Inheritance Tax (IHT) — The 10-year charge
Discretionary trusts are subject to the "Relevant Property Regime," meaning they face potential IHT charges that don't apply to simpler trusts. The main charge is the "periodic charge" — a tax of up to 6% on trust assets every 10 years, assessed on value over the nil rate band (currently £325,000).
Additionally, there's an "exit charge" when assets leave the trust (distributed to beneficiaries), calculated proportionally based on how long assets have been in trust.
In practice: Many family trusts never pay these charges because distributions occur within 10 years, or trust value stays below the nil rate band. Proper planning minimizes tax impact.
Income Tax and Capital Gains Tax
Trusts pay income tax at 45% on most income (20% on dividends up to £500), and Capital Gains Tax at 24% (2024/25 rates). However, income and gains distributed to beneficiaries are treated as beneficiaries' income/gains, often at lower personal rates.
Strategic timing of distributions can minimize tax. Trustees should consider beneficiaries' personal tax positions when making distributions.
Administrative requirements
Trustees must register the trust with HMRC's Trust Registration Service, file annual self-assessment returns, and maintain detailed records of all income, gains, and distributions. Professional trustees or accountants typically handle this, ensuring compliance while optimizing tax efficiency.
Limitations and when NOT to use a Discretionary Trust
Important limitations
Tax complexity: The Relevant Property Regime makes these trusts more expensive to administer than simpler alternatives. For modest estates (under £325,000), simpler trust types often make more sense.
Trustee burden: Trustees have significant ongoing responsibilities including tax returns, trust registration, record-keeping, and making difficult distribution decisions. Not everyone is willing or able to serve.
Lack of certainty: Beneficiaries have no guaranteed entitlement to anything. This can cause anxiety and family tension if not properly explained and managed.
Potential for disputes: Disgruntled beneficiaries may challenge trustees' decisions, particularly if they feel unfairly treated compared to other beneficiaries.
When alternative trusts work better
Use a Protective Property Trust if...
Your main goal is care fee protection for the family home with guaranteed survivor occupation. Simpler and no 10-year charges.
Use a Vulnerable Person Trust if...
You're providing for a disabled beneficiary who needs to preserve means-tested benefits. Specifically designed for this purpose with tax advantages.
Use a Life Interest Trust if...
You want someone to receive income for life with capital passing elsewhere on their death. More certainty, less complexity.
Use outright inheritance if...
Your beneficiaries are mature, financially responsible, in stable situations, and you trust them to manage inheritance sensibly.
Real-world example
Sarah's second marriage
Situation: Sarah, aged 62, remarried after being widowed. She has two adult children from her first marriage and her new husband has three children from his previous marriage. Together they own a £600,000 property and Sarah has £400,000 in savings.
The challenge: Sarah wanted to ensure her children eventually inherit her wealth, but also provide security for her new husband during his lifetime. Her children's circumstances varied wildly — one was a successful doctor, another struggling with addiction, and the third going through a difficult divorce.
Our solution: We created a discretionary trust in Sarah's will with her two sisters as trustees (alongside her husband). The trust named her husband and all five children as potential beneficiaries.
Letter of Wishes: Sarah wrote a detailed letter explaining she wanted her husband to live comfortably, but ultimate capital to go to her own children. She expressed concern about her middle child's addiction and her youngest's divorce, asking trustees to delay distributions until these situations stabilized.
Outcome: When Sarah passed away three years later, the trustees:
- • Allowed her husband to continue living in the property rent-free
- • Provided income to supplement his pension
- • Paid for her eldest child's children's private school fees
- • Held funds for her middle child in trust, paying for rehabilitation treatment
- • Waited until her youngest's divorce finalized before distributing her share
Result: Sarah's husband had financial security, her children eventually received their inheritance when it could genuinely help them, and the struggling children were supported without exposing funds to their creditors, ex-spouses, or addictions. The flexibility of the discretionary trust allowed the trustees to adapt to each situation as it evolved.
Frequently asked questions
Can beneficiaries demand money from the trust?
No. Beneficiaries have no legal entitlement to distributions. Trustees have absolute discretion to decide if, when, and how much to distribute based on beneficiaries' needs and the trust's purposes. Beneficiaries cannot force distributions.
Can trustees completely exclude a beneficiary?
Yes. Trustees can decide one beneficiary needs no support (perhaps they're wealthy) and distribute entirely to others who need help more. However, trustees must consider all beneficiaries and act reasonably.
What if all trustees die or can't serve?
Your will should name replacement trustees. If none can serve, the court appoints new trustees. We recommend naming at least three trustees with clear succession planning.
Can the trust continue for multiple generations?
Yes, but UK law limits trusts to 125 years maximum. Most family trusts operate for 20-30 years (one or two generations) before distributing all assets and winding up.
Who pays the tax — the trust or beneficiaries?
Income and gains retained in the trust are taxed at trust rates. Distributions to beneficiaries are treated as their income/gains, taxed at their personal rates. Strategic distribution timing minimizes overall tax.
Is my Letter of Wishes legally binding?
No. Trustees must consider it but aren't bound by it. This allows trustees to adapt to situations you couldn't foresee when writing it. However, trustees who completely ignore the letter without good reason could be challenged.
Can I change my mind about who the beneficiaries are?
While you're alive, you can rewrite your will and change the trust beneficiaries. Once you die, the class of beneficiaries is fixed (though trustees may have power to add/remove within that class if you've given them that power).
Do I need a professional trustee?
Not necessarily. Family trustees are common and cost-effective. However, professional trustees (solicitors, accountants) bring expertise and handle the tax/admin burden. Many families use both.
What if beneficiaries disagree with trustee decisions?
Beneficiaries can challenge decisions in court if they believe trustees acted improperly, dishonestly, or failed in their duties. However, courts rarely interfere with trustees' genuine exercise of discretion, even if beneficiaries disagree with the outcome.
How much does a Discretionary Trust cost to set up?
A standard will costs £175 single / £300 couple. Adding a Discretionary Trust costs an additional £150 single / £250 couple, making the total £325 single / £550 couple for a will with a Discretionary Trust.
How much does ongoing administration cost?
Family trustees charge nothing (though can claim expenses). Professional trustees charge 1-2% annually. Annual accountancy/tax work costs £300-£800. For a £400,000 trust, expect £3,000-£8,000 annually with professional trustees.
Should you set up a Discretionary Trust?
Consider your answer to these questions:
✓ A Discretionary Trust may be right if:
- • Your family situation is complex or uncertain
- • Beneficiaries' needs vary significantly
- • You're concerned about divorce or creditor risk
- • You want to support multiple generations
- • Beneficiaries lack financial maturity
- • You value flexibility over certainty
✗ Consider alternatives if:
- • Your estate is modest (under £325,000)
- • Beneficiaries are mature and responsible
- • You want simple, predictable inheritance
- • You're concerned about tax complexity
- • No suitable trustees are available
- • Your main goal is property protection only
Expert discretionary trust planning in Kent
David at Legacy Lines helps families navigate the complexity of discretionary trusts, ensuring your trust is structured to meet your family's unique needs while minimizing tax impact. We draft comprehensive Letters of Wishes that genuinely guide trustees in carrying out your intentions.
As an appointed representative of New Leaf (WWF) Ltd, we provide expert, compliant will writing and trust planning services. Evening appointments available.
Contact: David@legacy-lines.com
Last reviewed: October 2025
This information is for guidance only and does not constitute legal or tax advice. Trust taxation and administration are complex; individual circumstances vary significantly.