If you have ever spoken to a solicitor about estate planning, the words "discretionary trust" have probably come up. They are one of the most widely used structures in family wealth planning in England, and also one of the most misunderstood. Here is a plain-English explanation of what they are, when they work well, and when they may not be the right fit.
What is a discretionary trust?
A discretionary trust is a legal structure where assets are placed under the control of trustees, who then manage and distribute those assets for the benefit of a group of named beneficiaries. The key word is discretionary. No individual beneficiary is entitled to anything as of right. The trustees decide who receives a benefit, when they receive it, and how much they receive.
This is quite different from simply leaving money or property to someone in a will, where they would receive it outright and immediately. A discretionary trust puts the trustees in control, allowing them to respond to changing circumstances over time.
Why do families use them?
The flexibility is the main appeal. Circumstances change in ways you cannot predict when you set up an estate plan. A beneficiary might go through a divorce, face bankruptcy, develop an addiction, or need support at different life stages. Because no beneficiary has a fixed entitlement, assets held in a discretionary trust are generally protected from claims in a beneficiary's divorce settlement or from their creditors. An inheritance that would otherwise pass directly to a beneficiary, and potentially straight on to their creditors or former spouse, stays within the trust until the trustees decide it is appropriate to distribute it.
Trusts are also commonly used to provide for children or grandchildren who are too young to manage money responsibly, for beneficiaries with disabilities or care needs where means-tested benefits might be affected by an outright inheritance, and to preserve family wealth across generations.
What about tax?
This is where things get more complex, and where taking proper advice is essential.
Discretionary trusts are not tax-free vehicles. Assets transferred into a trust during your lifetime may be subject to inheritance tax as a chargeable lifetime transfer if they exceed £325,000. The trust itself is also subject to a periodic inheritance tax charge every ten years, and exit charges apply when assets leave the trust.
There are also significant changes coming into effect from April 2026. Agricultural Property Relief and Business Property Relief, which have historically allowed qualifying assets to be transferred into trust with little or no inheritance tax, are being capped at £1 million per person. This will materially affect how trusts are used for farm and business succession planning. Trusts created before October 2024 will be treated differently to those created after that date, and the transitional rules are complex. If you have business or agricultural assets and have not reviewed your estate plan recently, now is the time to do so.
Who should be a trustee?
Choosing the right trustees is one of the most important decisions you will make. Trustees have significant legal responsibilities. They must act in the interests of all beneficiaries, keep proper records, register the trust with HMRC's Trust Registration Service, and deal with tax filings. Many families appoint a combination of a trusted family member and a professional trustee such as a solicitor or accountant, to balance personal knowledge of the family with expert legal and financial judgement.
Is a discretionary trust right for you?
Not always. For straightforward estates, outright gifts or a well-drafted will may be more appropriate. The complexity and ongoing administration costs of a trust need to be weighed against the benefits. There are also alternatives worth considering, including life interest trusts, bare trusts, and family investment companies, each of which suits different circumstances.
The starting point is always a conversation about what you are trying to achieve. Protecting wealth for children from a previous relationship, providing for a vulnerable beneficiary, managing business succession, or simply ensuring assets don't end up in the wrong hands are all different problems that may call for different solutions.
Our private client team advises families on trust and estate planning across a wide range of circumstances. Get in touch to discuss your situation in confidence.
