Discretionary Trust with One Beneficiary

We have been presented with a Will including life interest of property for surviving spouse who has now died. Straightforward so far on life interest ending property divided between three adult children.

Residue divided into three shares, each expressed to be held on discretionary trusts with power to advance capital and income. On expiration of each trust which is specified to be the death of the beneficiary (one trust for each of the three adult children) it passes to the child of the ‘discretionary’ beneficiary.

Each trust has only ONE beneficiary with no power to add others. The adult children are all agreed at this point that the assets will be appointed out to them. One of them is very wealthy and wishes to redirect his share to his children. I cannot see how this can be dealt with otherwise than as a PET?

Am I missing something? I can’t see how the trust can continue with only one discretionary beneficiary (is it a bare trust) and for IHT purposes there is no benefit for the wealthy beneficiary in keeping his trust going.

Kathy Melkerts

I think the answer here is that if the Trustees do not exercise their discretionary powers in favour of a child, then whatever remains on their death will pass to their own children. This means that the Trustees are choosing between the child and the grandchildren in exercising, or not, their discretionary powers.

This should suit the wealthy child as the value of their share will be outside their estate for IHT on their death.

Graeme Lindop
Probate Consultant
Coles Miller Solicitors LLP

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I suspect you could advance capital out to the grandchildren under s.32 (assuming the grandchildren are not objects of the express power to distribute capital). s.32 would have to extent to the whole rather than half, either expressly under the will or under the recent statutory extension.

To my mind, it would only be a PET if:

  • there is no power to accumulate so current discretionary beneficiary (child) is effectively entitled to all income and therefore has an IIP; or
  • the child’s consent would be required under s.32(1)(c) although I don’t think that is the case where the prior interest is purely discretionary.

The current trusts are far from a bare trust because the children (of the testator) have no power to call for capital.