Discretionary Trusts

The usual form of Discretionary Trust creates a Trust Fund and identifies a class of beneficiaries who may, at the discretion of named Trustees, benefit from that Fund. 

The person creating the Trust (referred to as the Settlor) usually sets out in a Letter of Wishes how he or she would like the Trustees to act.  This Letter of Wishes is not however legally binding.  The members of the class of beneficiaries do not have an absolute right to benefit under the Trust. 

There is a general misconception that placing family assets into a Discretionary Trust provides a complete protection against those assets ending up in the hands of a non–family member such as a child’s former spouse or civil partner.  This is not the case.  For many years the Courts have had a statutory power to vary trusts in certain circumstances. 

In divorce proceedings the Courts in Northern Ireland may vary a Trust (including one made by a will or codicil) made on the parties to a marriage or civil partnership (other than one in the form of a pension arrangement).

The exercise of this power can have significant results.  This was illustrated in a court case in England when the judge exercised an equivalent statutory power to vary a Discretionary Trust to for provide a lump sum payment to the non–family member divorcing spouse.  In addition he ordered that the family member’s father was to be removed as protector (in this role no distributions could be made out of the trust fund without his consent) not only in relation to the lumps sum to be paid the non–family member divorcing spouse’s benefit, but also in relation to the remainder of the funds in the Discretionary Trust.

In another English decision however, the judge made clear that for the statutory power of variation to apply the Discretionary Trust must be one  which makes some form of continuing provision for both or either of the parties to a marriage or civil partnership, with or without provision for their children.  Accordingly not every type of Discretionary Trust will be subject to the statutory variation powers; it depends upon the circumstances and the substance of the Trust.

It should also be noted that even if the Court cannot vary a particular Discretionary Trust using the statutory variation powers it may be treated in divorce proceedings as a “financial resource” of a party to those proceedings if he or she has the potential to benefit under it.  This could result in the beneficiary being obliged to make a greater lump sum payment or make a greater maintenance contribution than would otherwise have been the case.

Legal advice should be sought as to whether or not an existing Trust may be subject to the Court’s variation powers.  Likewise when setting up a Discretionary Trust legal advice should be sought as to whether there are steps that can be taken to minimise the likelihood of the Trust being caught by these powers.

Discretionary Trusts have many positive merits and remain a valuable tool when planning the future distribution of assets. The purpose of this note is to draw attention to issues which may be overlooked and which should be considered and discussed with legal advisers before setting up a Discretionary Trust.

We have prepared a range of documents in relation to Discretionary Trusts, ranging from fully flexible Discretionary Trusts to draft Letters of Wishes.

If you would like more information in relation to these matters please contact either Eric Kyle or Jonathan Coen of this office.

The foregoing is a commentary on the law as at 1st October  2014 and it is recommended that specific legal advice should be take in relation to issues arising or relating to this commentary to deal with the particular circumstances involved.