My client has a daughter, not a minor, who he wishes to leave 40% of the residue of his estate to. However, he is concerned that she is not financially responsible. Accordingly, he would like to protect the assets using some kind of trust. The only option I can think of is a protective trust in accordance with s.33 Trustee Act. Are there any other options my client should consider?
Why not a full discretionary trust of residue with Letter of Wishes stating the residual distributions, including the 40% to held in Trust for the daughter. Allows him ongoing flexibility to alter LoW if situation changes as well ability to view circumstances at death.
As always with a DT I’d suggest professional trustees.
1 Like
Thanks, Karl. My concern there would be that by putting the entire residue into discretionary trust, rather than just the 40% for that daughter, he is creating a discretion over the remaining 60% when his wishes regarding that 60% are certain (40% of that is to go to his son and 20% to his adopted daughter).
I was wondering whether he could give the executor a special power of appointment over the 40% with a gift over to beneficiaries of his choice. Any thoughts?
You can create a discretionary trust over 40%, and gift the remaining 60% absolutely.
3 Likes
My view is he is certain right now but what about later? What if he then believes 40% is too much, or too little. Or that he then thinks his daughter isn’t all that bad with money so can have it one go so he only needs to change the LoW.
It’s the flexibility that leads me to the DT option as he can change his views without necessarily having to change his Will. It may be its all appointed out anyway…
1 Like
Thanks, Haroon. I am still somewhat confused whether that would be a discretionary trust, i.e. would it impose an obligation to distribute to the beneficiary, or would it be a mere power, i.e. giving the trustees an ability to distribute to the beneficiary, but no obligation to do so.
If it has more than one potential beneficiary, then I can’t see any argument for it not being a discretionary trust. You could even add charity within the class of beneficiary. Provided the trustees are chosen wisely (reference @Karl 's message above), I cant see this arrangement being problematic.
For what it’s worth, I would tend to advise as per Karl’s answer… the advantage of the discretionary trust is flexibility, and the main disadvantage is where you have a lack of clear wishes or appropriate trustees.
1 Like
From the above, it seems there are three options:
Life interest trust which ends if A does anything which means she would lose her life interest, such as her becoming bankrupt or attempting to sell her life interest. At that point, the trust becomes a discretionary trust over the income with that child’s spouse, children, grandchildren, etc. as beneficiaries. If there are no such family members, the discretionary beneficiaries will be the child and the person who would receive the trust property following her death. Can also include power to transfer capital to the beneficiary or use it for her benefit. Can also state who should receive capital following the A’s death.
Discretionary trust of 100% of the residue with all three children as beneficiaries (and possibly the children’s spouses, children, grandchildren, etc.) with letter of wishes saying how much each child should receive and the need to provide A’s share in a way that protects it from being wasted. Can state who should receive assets if discretion is not fully exercised.
Discretionary trust of 40% of the residue with A and her spouse (if any), children (if any), grandchildren (if any), etc. as beneficiaries. Currently, A has no such family. Can state who should receive assets if discretion is not fully exercised.
Option 1 has the benefit of not being subject to exit charges and 10-year anniversary charges. Option 2 and 3 would be subject to exit charges and 10-year anniversary charges. However, could avoid those charges to the extent one distributes the assets within two years of the testator’s death.
One question still comes to mind, which is can one simply create a trust for the maintenance a A with a power of appointment in her favour, thus avoiding the risk that trustees of a discretionary trust could do something other than that requested by the settlor? The testator could also include a gift over in case any funds remain at the date of A’s death. It is also not clear to me whether A’s interest under such a trust would be a qualifying interest in possession.