“If the donor is a trustee, of course, they can determine what happens at every stage. But if not, or after their lifetime, it’s not as simple. It’s possible for a trust deed to include specific restrictions and specifications that the trustees must follow, but it’s normally regarded as best to maintain future flexibility.
“Instead, the settlor can make known their preferences in a non-binding ‘letter of wishes’. There’s nothing to guarantee that the trustees will honour those wishes – but after all, the essence of a trust is placing your trust in other people.”
Smart says that if a client is looking to be able to add beneficiaries later or wants to give trustees the ability to take the beneficiaries’ circumstances into account, a discretionary trust would be more appropriate.
He adds: “If using a discretionary trust, you should also leave a letter of wishes setting out what you would like your trustees to consider in deciding how to distribute the benefits from the policy.”
For example, the adviser’s client might want their trustees to consider the needs of a spouse or partner first before paying any benefit to another beneficiary such as a child or grandchild.
The trustees are not bound by this and could make a different decision, but will usually take the client’s wishes into account in making any decision on who to pay and when.
A discretionary trust is extremely flexible and allows the trustees to adapt to changes in circumstances such as divorce, new relationships or new children being born.
Moore says choosing the right trust for a client’s specific needs is crucial, as the type of trust will dictate how much it can be amended to suit a changing family structure.
For example, additional beneficiaries cannot be added to a bare trust but they can usually be added to a discretionary trust, depending on the drafting.
Moore adds: “As trustees of a discretionary trust have considerable influence over the trust, its assets and its distribution, it is crucial that the right people are appointed.
“To ensure impartiality and avoid conflicts of interest, a professional trustee/trust company might be a reasonable option to avoid any such issues arising.”
If the client wants to have peace of mind that their wishes will be kept, assuming a will trust solution is adopted, the client should choose trustees very carefully, as they will be administering the trust after the client has died, Graeme Robb, senior technical manager at M&G Wealth, says.
