IHT—use of discretionary Will trusts
Produced in partnership with Katya Vagner of PwC
IHT—use of discretionary Will trusts

The following Private Client practice note produced in partnership with Katya Vagner of PwC provides comprehensive and up to date legal information covering:

  • IHT—use of discretionary Will trusts
  • Why discretionary Will trusts are used
  • IHT treatment of discretionary Will trusts
  • Two-year discretionary trusts
  • Frankland trap
  • Planning points
  • NRB discretionary trusts
  • Other taxes
  • Will drafting with IHTA 1984, s 144 in mind
  • Comparison with variations under IHTA 1984, s 142
  • More...

IHT—use of discretionary Will trusts

A discretionary trust is a very flexible form of trust. In these trusts, the trustees have the discretion to determine when, how and to whom distributions of capital and income should be made. Beneficiaries (or a class of beneficiaries) are named in the trust deed and it is left entirely up to the trustees to decide which of the potential beneficiaries is to benefit, sometimes with the guidance of a letter of wishes.

Why discretionary Will trusts are used

For various reasons, it may not be desirable to leave assets directly to a beneficiary in the Will. For example:

  1. the beneficiary is, or in the future might become, bankrupt

  2. the beneficiary is, or in the future might be, going through a divorce

  3. the beneficiary is disabled, needs help with managing money or receives state benefits where any money received directly from the estate might affect their entitlement to such benefits

  4. the potential beneficiary is very young at the date of the making of the Will and it is not prudent to make any assumptions about their future family/financial circumstances

A discretionary Will trust provides a flexible solution by providing for a group of beneficiaries, which often includes a surviving spouse or civil partner and other family members. In broad terms, section 144 of the Inheritance Tax Act 1984 (IHTA 1984) confers inheritance tax

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