What is a discretionary trust?

A discretionary trust is where the trustees use their discretion to decide who may benefit from the trust and when. It is created by means of a gift, and the beneficiaries are not fixed. The beneficiaries cannot demand their rights from the trustees. Depending on how the trust is set up, you, as the settlor, may or may not be able to be a beneficiary of the trust.

Why use a discretionary trust?

Passing on your wealth – You, as the settlor, can write a letter of wishes specifying how you would like the trust to be used. Whilst not binding, this can provide you with reassurance over how the trust assets will be used.

Avoiding probate – Assets held within a trust are legally owned by the trustees on behalf of beneficiaries. This avoids the need for probate on your death and the subsequent delays associated with administering the estate.

Eliminating forced heirship – Depending on where you live, you may not be entirely free to decide who may benefit from your estate when you die. In many countries (such as Argentina, Brazil, Spain and France), laws of succession define specific rights for heirs, known as forced heirs. The law in the Isle of Man (Manx law) recognises an individual’s right to create a trust under Manx law, even if your home jurisdiction does not.

Ensuring the right people benefit from your assets – A discretionary trust can help you ensure your assets are passed on to those who you want to receive them.

Complex families – You may wish to ensure all assets are held only for the benefit of your own children, rather than any step-children, or similarly for the benefit of your current spouse/partner and not for an ex-spouse/partner.

Trust confidentiality – The terms of a trust, unlike those of a will, are private and can offer greater confidentiality. This can be particularly useful in complex family situations.

Professional trustees – Utilising a corporate trustee service, such as that offered by Old Mutual International Trust Company, can give you peace of mind that the assets will be dealt with in a professional and unbiased manner.

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