How to Include a Discretionary Trust in a Will

A discretionary trust in a will is a flexible and powerful estate planning tool. It enables you to place assets into trust on your death and give appointed trustees the discretion to decide which beneficiaries benefit, when they receive benefits and how much they receive. Discretionary trusts help manage uncertainty, protect vulnerable family members, and respond to changing circumstances after you die. This guide explains how discretionary trusts work, the legal steps to include one in a will in England and Wales, practical considerations and common questions you should understand before creating one.

What Is a Discretionary Trust?

A discretionary trust is a form of express trust where trustees have powers to decide which beneficiaries from a specified class should benefit, and in what proportions or at what times. Under a discretionary trust included in a will:

• The will itself sets out the trust terms, and the trust comes into effect on your death.
• Trustees are appointed to manage and distribute the trust assets.
• Beneficiaries have potential rights rather than fixed entitlements; trustees decide whether, when and how they benefit.

These trusts differ from fixed trusts, where each beneficiary's share is defined, because trustees retain flexibility to respond to circumstances trustees could not predict when the will was made.

Why Use a Discretionary Trust in a Will?

Including a discretionary trust in your will can be appropriate for several reasons:

1. Flexibility in Beneficiary Support

If you are unsure how your beneficiaries' needs may change over time - for example if children are young or vulnerable - trustees can distribute capital or income when appropriate rather than immediately on death.

2. Protection from External Claims

Trust assets are held by trustees and not vested outright in beneficiaries, which can protect assets against claims by creditors, divorce settlements, bankruptcy or irresponsible financial decisions by a beneficiary.

3. Estate and Tax Planning

A discretionary trust can help mitigate risks in larger estates and offer strategic control over how wealth passes down generations. Trustees may be guided by your Letter of Wishes (an informal but standard practice) to help reflect your intentions without binding legal obligations.

Legal Principles for Discretionary Trusts in Wills

A discretionary trust must satisfy the three certainties of English trust law to be valid:

1. Certainty of intention – the will must clearly show that you meant to create a trust rather than make a gift.
2. Certainty of subject matter – the assets or property subject to the trust must be identified clearly.
3. Certainty of objects – the class of beneficiaries must be defined, even if individual names are not specified.

If these requirements are not met, a trust could fail and assets might be distributed under normal probate rules instead, with unintended legal or tax consequences.

Step‑by‑Step: Including a Discretionary Trust in Your Will

Step 1: Identify Your Trust Objectives and Beneficiaries

Decide why you want a discretionary trust and who might benefit. Common beneficiary categories include children, grandchildren, family members, charities or a wider class such as “my descendants”. You may also use a Letter of Wishes to guide trustees on how you expect them to exercise discretion, though this letter is not legally binding.

Step 2: Select Your Trustees

Trustees are responsible for managing trust assets and exercising discretion. Consider appointing:

• Trusted family members or friends
• Independent or professional trustees such as solicitors or accountants

You can appoint multiple trustees to share duties and provide continuity. Trustees must be adults with legal capacity to act.

Step 3: Draft the Discretionary Trust Clause in Your Will

The trust provisions must be drafted precisely in the text of your will. They should:

• Specify which assets are to be placed into the trust (for example a property, investments or a share of your estate).
• Identify the class of potential beneficiaries.
• Set out your trustees' powers and discretions (for example when and how distributions may be made).

The trust terms normally form part of your will, which acts as the trust deed at death. Legal drafting is important to avoid ambiguity and ensure the trust operates as you intend.

Step 4: Add a Letter of Wishes (Optional but Recommended)

A Letter of Wishes is a separate, informal document that guides your trustees on how you would like them to use their discretion. Trustees are not legally bound by it, but it helps ensure your intentions are understood. For example, you might set out preferences about distributions on certain anniversaries or conditions for beneficiaries.

Step 5: Execute the Will Properly

Your will must be signed in the presence of two independent witnesses who are not beneficiaries or spouses/civil partners of beneficiaries. All signing formalities must be complied with for the will (and thus the trust) to be legally valid. A will that fails formal execution can result in the trust provisions being void.

Step 6: Register the Trust with HMRC if Necessary

After your death, trustees may need to register the discretionary trust with HM Revenue & Customs' Trust Registration Service (TRS) if the trust holds chargeable assets or becomes liable for tax (for example income tax or capital gains tax). Registering ensures compliance with tax obligations and trustee reporting requirements.

Trusts created on death may still attract inheritance tax charges and recurrent tax events during the life of the trust, so trustees should seek advice on tax reporting and registration.

Practical Considerations

Tax Implications

Discretionary trusts are subject to specific tax treatment under the UK tax regime. While there is no separate “tax identity” for the trust itself, trustees must handle:

• Inheritance tax if the estate exceeds the nil‑rate band, particularly if the trust holds assets after death.
• Income tax on trust income at trustee rates.
• Capital gains tax when trust assets are disposed of or transferred.

These tax aspects are complex and may affect your planning choices, especially for larger estates. Professional advice can help trustees manage compliance.

Estate Administration and Trustee Duties

Trustees must manage the trust responsibly, keep records and act in the best interests of the beneficiaries. This includes prudent investment, making decisions about distributions and complying with legal and tax filing requirements.

Choosing trustees who understand their obligations or who are prepared to work with professional advisers is important to ensure the trust fulfils its intended purpose without administrative or legal difficulties.

Common Questions

Can a discretionary trust include future generations?
Yes. You can specify a class of beneficiaries that includes future descendants, allowing trustees discretion over distributions to children and grandchildren as circumstances require.

Does the trust provide a fixed entitlement to beneficiaries?
No. Beneficiaries in a discretionary trust do not have automatic rights to trust assets; trustees decide who benefits and to what extent from a list or class you nominate.

What happens if trustees refuse to distribute assets?
Trustees are bound to exercise discretion reasonably, but they are not compelled to distribute assets simply to satisfy every potential beneficiary. If trustees act unreasonably, beneficiaries may have legal recourse to seek oversight through the courts. However, discretionary powers are broad and deferential.

Key Takeaways

Including a discretionary trust in a will enables you to create a flexible framework for managing your estate after death. Such trusts place assets into the hands of trustees, who decide how and when beneficiaries benefit. They are particularly useful for protecting vulnerable beneficiaries, managing changing needs, and adding a layer of asset protection. To include a discretionary trust in your will, you must decide on beneficiaries and trustees, draft clear trust terms in the will, consider a Letter of Wishes to guide trustees, comply with will‑execution formalities and be aware of tax and administrative obligations. Proper planning and careful drafting help ensure the trust operates effectively and according to your intended legacy.