It was Forrest Gump who said "life is like a box of chocolates". He was not wrong as you never know what you gonna get! The same can be said about a discretionary trust.
Discretionary trusts are technically very complicated but when you take all the tax gobbledegook and technical bits away they are really quite simple. However, they can be complicated to explain so Kelly looks to find ways of explaining things that people understand. Many have heard her talk about boxes of chocolates when she talks about trusts and many continue to remember her explanation for years to come. When anyone at Argo is asked to give an explanation of a discretionary trust they all say the same!
When you think about a discretionary trust you must think of it like a box of chocolates. For the purposes of illustration Kelly gets her clients to think about a tin of quality street, the chocolates which families fight over at Christmas!
You need to think about the chocolate tin as the secure, impenetrable container that cannot be broken into. The various chocolates inside the tin represent different assets, for example the purple one could represent a Lloyds Bank account, the orange cream could be Premium bonds, the milk chocolate block may be shares in BP, the strawberry delight a house. The chocolates represent the mix of assets you have in your estate. These assets are safely put into the tin and securely kept until the tin is ready to be opened.
Until the tin is opened it is given to people you know and trust who will make sure that the contents are kept safely until the time is right. These individuals are called your trustees. Ideally there should be two of these.
The family members who then fight over access to the quality street tin at Christmas are your beneficiaries. None of them have the right to say any of the sweets are theirs so they have to wait and see what the trustees do. Just like a beneficiary of a trust. No discretionary beneficiary has the right to the assets within the trust. It is up to the trustees to decide which beneficiaries receive assets, how much they have and when, but this is not without guidance.
If you are anything like Kelly the quality street tin at Christmas has strict rules about when it can be opened and who can have what, otherwise there would be carnage! These rules can be written down in a rule book which is also known as a letter of wishes. This letter is the guidance to trustees as to when the trust can be opened, what can be removed, the circumstances of when things can be removed and the beneficiaries who should receive assets. It could be that a rule is set that a grandchild can have some money withdrawn to help with driving lessons when they are eighteen but that money is not to be released to purchase a sports car if they pass their test. It may be that money is leant to a child to help with a mortgage or funds are to be used for a disabled child whose benefits provide insufficient funds for holidays. The rule book can be as minimal or as detailed as it needs to be for the circumstances of your family.
If a situation arises which is detailed in the letter of wishes the trustees can open the trust and make a distribution to a beneficiary or, in simple terms, can open the chocolate box and give a chocolate to a family member. Sometimes the trustees are told that they cannot give an asset away completely but they can give interest or dividends to a beneficiary. This is a lot like lifting the lid on the tin and allowing the family member to smell the chocolatey aroma before closing the lid again!
A discretionary trust is a flexible thing that can be used to achieve many different outcomes. If you have a family member who receives benefits they can be used to protect the benefits whilst protecting their inheritance, they can be used to protect assets from the ravages of care charges, they can be used to protect a vulnerable beneficiary who is unable to manage money or is at risk of undue influence and scams.
Yes, of course, there are rules and regulations that must be followed once a discretionary trust is created but these can be discussed at another time. What is important now is that you can go away and talk happily to your family about the discretionary trust you want to create during your lifetime or in your will without even mentioning the phrase. They may, just like some of our clients, think you may be are a little bit bonkers before they realise you are talking complete sense!
If you feel you need a little more of Kelly's madness and fantastic explanations please give her a call on 01622 843729.
