Sometimes, particularly where you have complicated assets and/or family situations, it is difficult to know how to word your Will. For example, where you have business interests, the value/structure of the business can change from time to time, which makes it difficult to judge what the position will be when you die. There can also be family issues, for example, if you have young children, you will not know, at the time of making your Will, whether any, all or none of them will become involved with your business.
Added to that, the rules of Inheritance Tax are constantly changing. Currently, we have a generous business property relief which, subject to some restrictions, allows you to pass your interest in a trading (as opposed to investment) business to your heirs free of Inheritance Tax. There is further relief available for assets which you own outside your business, which are used for the purposes of your business. In recent years, there has been a tendency for the Government to change tax law, with little notice and some times with retrospective effect. This makes it very difficult to plan your Will, with Inheritance Tax saving in mind.
If faced with all this uncertainty, one solution is to use a discretionary trust in your Will. With a Discretionary Trust Will, you appoint as Trustees people who you would trust to make decisions on your behalf, following your death. The Will then goes on to provide that the whole of your estate (or perhaps just specific assets, such as your business) passes to your Trustees to hold on discretionary trusts.
You need to name, in the Will, the people who you want to benefit from this legacy. This will usually be your surviving spouse, your children and grandchildren, but it could include anyone else you might possibly want to benefit and also charities and established trusts. The Trustees are given an absolute discretion as to how to administer your estate/business and how to apply capital/income from it between those beneficiaries. The estate/business does not have to be distributed straight away and some or all the assets could remain in the discretionary trust for a period of up to 125 years.
Although the Trustees have an absolute discretion, it is common practice for the person making a Discretionary Trust Will to leave a separate note, in which they set out their wishes as to how their estate/business is to be divided/held. Technically, this separate, confidential letter of wishes is not binding on the Trustees but in practice it is likely to be followed.
If your Will is structured in this way, then it is not necessary to amend the Will itself, as your circumstances change. Provided you have listed all the people who you might want to benefit from your estate, you can simply review your confidential letter of wishes on a regular basis and update that.
Following your death, what happens in practice is that your Trustees will meet with appropriate members of your family and professional advisers, in full knowledge of all the circumstances prevailing at the time of your death, in relation to your business, your family and the tax law applicable at the time. Taking into consideration your wishes, they can then decide how to administer your discretionary trust.
For example, they might decide to retain on discretionary trust those business interests which qualify for 100% Inheritance Tax relief, together with a sum equivalent to your nil-rate band for Inheritance Tax purposes. The remainder of your estate could be appointed to your surviving spouse either outright or on life interest trusts, to secure the spouse exemption.
If the Trustees make appointments out of the trust within two years following your death, those distributions can be read back into your Will for Inheritance Tax purposes. This means that, for a married couple, provided good use is made of the nil-rate band, the spouse exemption and business property relief, there should be no Inheritance Tax payable on the first death or for the first 10 years of the trust, if it is kept running.
In your confidential note of wishes, you can specify how you would like your estate/ business interests to be dealt with. For example you might want the Trustees to retain them, to pass on to any of your children who become involved in the business or, alternatively, you may decide that following your death, the business should be wound up and sold. If any of your children are experiencing financial or matrimonial problems at the time of your death, then the Trustees will have the power to retain assets in trust, and distribute them to your children if/when their problems have been resolved.
To summarise, Discretionary Will Trusts are commonly used by people who are not able to decide, with any certainty, how to distribute their estates, when making a Will. Although, I have emphasised how these trusts can be useful for business proprietors, they can be used in most circumstances where there is uncertainty or a need for flexibility or protection. By using the Discretionary Will Trust, you are effectively leaving your Trustees to make the decisions for you, following your death, guided by your wishes and in full knowledge of all the circumstances prevailing at the time of your death. The trust gives them the flexibility to react to those circumstances and to distribute your estate in a way which benefits your family and business. It is essential that the people you choose to be your Trustees are people who you would trust to make important decisions on your behalf, in the best interests of all concerned.
The above represents a brief summary of the benefits of using a Discretionary Will Trust. For comprehensive advice about the use of discretionary trusts, please contact Vicky Bligh on 01822 856332 or email email@example.com.