When planning your estate, understanding the different types of trusts available can help you make informed decisions about your family’s financial future. Discretionary will trusts offer flexibility and control, but it’s important to understand how they work and their tax implications.

What is a discretionary will trust?

A discretionary will trust is the most flexible form of trust available. It enables trustees to use and distribute the income and capital entirely at their discretion – they have complete control over who receives what and when.

This flexibility makes discretionary trusts particularly valuable when:

  • You’re uncertain about future family circumstances
  • You want to protect assets for vulnerable beneficiaries
  • Family members have different financial needs
  • You need to respond to changing tax laws
  • There’s a risk of divorce or bankruptcy affecting beneficiaries

How does a discretionary trust work?

In any trust arrangement, there’s a separation between legal ownership and who actually benefits from the assets. The trustees hold legal title to the assets but cannot benefit personally. Instead, they must manage the trust property for the beneficiaries’ benefit, following the instructions in the trust deed.

For discretionary will trusts specifically:

  • The trust is created when the person making the will dies
  • Trustees have full discretion over distributions
  • No beneficiary has an automatic right to income or capital
  • Trustees can respond to changing family circumstances
  • The trust offers protection from beneficiaries’ creditors or divorce proceedings
  • Professional trustees can be appointed alongside family members

Discretionary will trust inheritance tax

Understanding the inheritance tax implications of discretionary trusts is crucial for effective estate planning.

Initial inheritance tax position

If you leave your entire estate to a discretionary trust, this creates a chargeable transfer for inheritance tax purposes – even if your spouse is a beneficiary. The whole estate is subject to inheritance tax at 40% above the nil-rate band.

However, there’s an important two-year window that offers significant planning opportunities. Any distributions from a discretionary will trust within two years of death are treated as if made by the deceased in their will. This means:

  • No exit charges apply during this period
  • Distributions to exempt beneficiaries (spouse/charity) can trigger inheritance tax refunds
  • You can effectively rewrite the will through trust distributions
  • Family circumstances can be reassessed after death

Ongoing inheritance tax charges

After the two-year period, discretionary trusts face two types of inheritance tax charge:

  1. Ten-year anniversary charges: Up to 6% on the trust value above the nil-rate band (currently £325,000)
  2. Exit charges: Proportionate charges when capital leaves the trust (income distributions remain exempt)

The actual rates depend on the settlor’s inheritance tax history and any other trusts they created. These charges, while significant, are often outweighed by the protection and flexibility the trust provides.

Discretionary will trust taxation

Discretionary trusts face specific tax treatment that differs from individual taxation:

Income tax rates:

  • First £1,000 of income: 20% (non-savings) or 7.5% (dividends)
  • Income above £1,000: 45% (non-savings/interest) or 38.1% (dividends)
  • No personal allowances available
  • Trust expenses can reduce taxable income

Capital gains tax:

  • Annual exemption: £6,150 (half the individual allowance)
  • Tax rate: 20% or 28% for residential property
  • Holdover relief may be available on certain distributions

Is a will trust a discretionary trust?

Not all will trusts are discretionary trusts. Your will might create different types of trust, each with distinct features:

  • Life interest trusts: Beneficiary entitled to income for life
  • Bereaved minors trusts: Specific tax advantages for children
  • Disabled persons trusts: Special tax treatment for vulnerable beneficiaries
  • 18-25 trusts: Lower inheritance tax charges for young adults
  • Fixed interest trusts: Predetermined beneficial interests

Discretionary trusts offer maximum flexibility but may not suit every situation. We can help you choose the right trust structure for your family’s needs.

Advantages of a discretionary will trust

Discretionary will trusts offer significant advantages that make them valuable estate planning tools for many families:

  • Maximum flexibility: Trustees can adapt to changing family circumstances, financial needs, and tax laws without needing to alter the will
  • Asset protection: Trust assets are protected from beneficiaries’ creditors, divorce settlements, and bankruptcy
  • Vulnerable beneficiary safeguarding: Ideal for beneficiaries who may struggle with money management due to age, disability, or addiction
  • Tax planning opportunities: The two-year window allows post-death tax planning and potential inheritance tax savings
  • Generation-skipping: Assets can be preserved for grandchildren while supporting children if needed
  • Privacy: Trust distributions remain private, unlike outright inheritances through probate

These benefits are particularly valuable for:

  • Blended families with complex dynamics
  • Families with beneficiaries at different life stages
  • Estates where business assets need protecting
  • Situations where mental capacity is a concern
  • International families with cross-border considerations

The flexibility to respond to unforeseen circumstances often outweighs the additional complexity and costs involved.

Disadvantages of a discretionary will trust

While flexible, discretionary will trusts have some drawbacks to consider:

  • Complexity: Require ongoing administration and tax compliance
  • Costs: Professional fees for trustees, tax returns and advice
  • Tax rates: The trust pays up to 45% tax on income, compared to 20-45% for individuals
  • No entitlement: Beneficiaries cannot demand distributions
  • Ten-year charges: Ongoing inheritance tax exposure
  • Limited reliefs: Some capital gains tax reliefs unavailable

These disadvantages must be weighed against the protection and flexibility offered, particularly for complex family situations.

Tax treatment for beneficiaries

When beneficiaries receive income from a discretionary trust, it comes with a 45% tax credit regardless of the trust’s actual tax position. This creates opportunities:

  • Basic rate taxpayers can reclaim overpaid tax
  • Non-taxpayers receive substantial refunds
  • The trust maintains a “tax pool” to track available credits
  • Careful timing of distributions can maximise tax efficiency

For capital distributions, beneficiaries generally receive assets at market value with no immediate tax consequences for them.

Key considerations for discretionary will trusts

Before choosing a discretionary trust, consider:

Family circumstances: Are there vulnerable beneficiaries needing protection? Will family dynamics change?

Estate size: Will ten-year charges significantly impact the trust value? Is the estate large enough to justify ongoing costs?

Trustee selection: Who will make these important decisions? Should you appoint professional trustees?

Letter of wishes: How will you guide trustees without legally binding them?

Professional advice: Complex rules require expert guidance throughout the trust’s life

How Wellers can help

Our experienced private client team understands the complexities of discretionary will trusts and can guide you through every step of the process.

We offer:

  • Initial consultations to assess whether a discretionary trust suits your needs
  • Expert drafting of wills incorporating trust provisions
  • Ongoing trustee services and administration support
  • Tax planning advice to minimise inheritance tax exposure
  • Clear, fixed-fee pricing for transparency

Our STEP-qualified solicitors have extensive experience in:

  • Complex estate planning for high-net-worth individuals
  • Multi-generational wealth preservation
  • Family business succession planning
  • International trust structures
  • Charity legacy planning

Next steps

Discretionary will trusts offer valuable flexibility for estate planning, but their complexity requires careful consideration and expert advice. Our experienced trust solicitors can help you understand whether a discretionary trust suits your circumstances and guide you through the setup process.

For confidential advice about discretionary will trusts or to discuss your estate planning needs:

Call us: 020 3994 4988
Email: wellers.wealth@wellerslawgroup.com