{"id":882,"date":"2021-12-22T05:45:56","date_gmt":"2021-12-22T05:45:56","guid":{"rendered":"https:\/\/uk.legalvision.com.au\/?p=882"},"modified":"2025-07-02T00:42:38","modified_gmt":"2025-07-01T23:42:38","slug":"discretionary-trust","status":"publish","type":"post","link":"https:\/\/legalvision.co.uk\/business-structures\/discretionary-trust\/","title":{"rendered":"How Do I Set Up a Discretionary Trust in England and Wales?"},"content":{"rendered":"\n<p><span style=\"font-weight: 400\">You may be familiar with the concept of trusts<\/span>, and <span style=\"font-weight: 400\">a discretionary trust m<\/span>ay be <span style=\"font-weight: 400\">relevant <\/span>for <span style=\"font-weight: 400\">your business. You will find that discretionary trusts have limited use in running a business. Still, they can e<\/span>ffectively <span style=\"font-weight: 400\">keep your business within the family o<\/span>r friends<span style=\"font-weight: 400\"> as part of your estate planning<\/span>. <\/p>\n\n\n\n<p><span style=\"font-weight: 400\">This article will explain the underlying principles of trust law<\/span>. It will also explain <span style=\"font-weight: 400\">discretionary trusts and their commercial relevance, particularly in a family business context. Finally, it will explain the process for creating a discretionary trust.\u00a0<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400\">Understanding Trusts<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400\">To understand how trusts operate, you first need to understand the law behind property ownership.<\/span><br><span style=\"font-weight: 400\">\u00a0<\/span><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span style=\"font-weight: 400\">Beneficial Ownership<\/span><\/h3>\n\n\n\n<p><span style=\"font-weight: 400\">Generally, if you own an item of property, you are free to use it as you wish<\/span>. This includes houses, cars, and money. You will be the &#8216;beneficial owner&#8217; of the property if you can both: <\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>enjoy the use of it (e.g. driving a car); and<\/li><li>dispose of it (e.g. selling a car). <br><\/li><\/ul>\n\n\n\n<h3 class=\"wp-block-heading\"><span style=\"font-weight: 400\">Legal and Beneficial Interests<\/span><\/h3>\n\n\n\n<p><span style=\"font-weight: 400\">Trusts are sophisticated legal vehicles that take the concept of beneficial ownership and split it into two parts, which are:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">the beneficial interest \u2014 i.e. the right to enjoy the property; and<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">the legal interest \u2014 i.e. the right to dispose of the property.<\/span><\/li><\/ul>\n\n\n\n<div class=\"box box--icon box--info\">\n<p><span style=\"font-weight: 400\">The person that creates the trust will be someone who has beneficial ownership in the property. This person is called the \u201csettlor\u201d.&nbsp;<\/span><\/p>\n<\/div>\n\n\n\n<p><span style=\"font-weight: 400\">The settlor will take the property (\u201ctrust property\u201d) which he intends to hold \u201con trust\u201d and do two things with it:<\/span><\/p>\n\n\n\n<ol class=\"wp-block-list\"><li><span style=\"font-weight: 400\">they will transfer the beneficial interest in the property to one or more people, called the \u201cbeneficiaries\u201d; and\u00a0<\/span><\/li><li><span style=\"font-weight: 400\">transfer the legal interest (or \u201cthe legal title\u201d) to another group of people, called the \u201ctrustees.\u201d<\/span><br><\/li><\/ol>\n\n\n\n<h3 class=\"wp-block-heading\"><span style=\"font-weight: 400\">The Trust&nbsp;<\/span><\/h3>\n\n\n\n<p><span style=\"font-weight: 400\">Usually, the trust property will contain a combination of money, shares in companies, and \u201creal property\u201d like land and buildings. The trustees will then have a legal obligation to manage the trust property according to the terms of the trust. A document known as the \u201ctrust document\u201d or \u201ctrust deed\u201d will detail the terms of the trust.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400\">Additionally, the trustees will need to have the legal title so that they have the authority to manage the property by buying, selling, and <a href=\"https:\/\/legalvision.co.uk\/corporations\/trustee-duty-to-invest\/\">reinvesting the property<\/a> \u2014 all ultimately in the interest of the beneficiaries. Having the legal title makes it very easy for the trustees to abuse their position and act in their own interest. So, the law imposes a fiduciary duty on the trustees. This duty ensures that trustees can only ever act in the interests of the trust and the beneficiaries.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400\">The beneficiaries, not having the legal title, do not have the power to dispose of the trust property. This is why trusts are a useful way to ensure that a child or someone incapable of managing their own affairs can still make use of the trust property.&nbsp;<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400\">Discretionary Trusts&nbsp;<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400\">Discretionary trusts differ from fixed trusts in one critical way. Importantly, the beneficiaries of a discretionary trust do not have an absolute right to enjoy the trust property unless the trustees decide they do.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400\">In practice, this means that you, as the settlor, can nominate a group of beneficiaries but then leave it to the trustees to decide who among them can actually enjoy the benefit of the trust property.&nbsp;This will permit the trustees to consider the personal circumstances of each beneficiary and determine if and by how much they can enjoy the trust property. Therefore, discretionary trusts are more flexible than fixed trusts.&nbsp;<\/span><\/p>\n\n\n\n\n<a href=\"#content-next\"\n   class=\"block p-4 mt-10 text-xl font-bold text-center text-white no-underline bg-gray-800 rounded-t-xl\">\n    Continue reading this article below the form\n    <i class=\"text-xl fa-regular fa-arrow-down\"><\/i>\n<\/a>\n<div class=\"px-6 pt-10 pb-12 mb-10 text-center bg-gray-100 rounded-b-xl sm:px-12 test\">\n    <div class=\"mb-8 text-2xl font-bold text-orange\">\n        Need legal advice?\n        <br>\n        <span class=\"text-lg not-prose\">\n                            Call <a href=\"tel:+448081968584\" class=\"not-prose\">0808 196 8584<\/a> for urgent assistance.\n                <br>\n                Otherwise, complete this form, and we will contact you within one business day.\n                    <\/span>\n    <\/div>\n\n    \n\n<div class=\"not-prose flex justify-center text-left gform_input_bg_white    \">\n    <script>\nvar 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Likewise, you are nearing retirement and want to ensure that your business will remain within your family after your retirement and, ultimately, your death.\u00a0<\/span><br><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span style=\"font-weight: 400\">How Discretionary Trusts Can Help&nbsp;<\/span><\/h3>\n\n\n\n<p><span style=\"font-weight: 400\">Creating a discretionary trust gives the trustees the power to exercise their discretion later in the future. They can decide when and how your family members can participate in and enjoy the family business.&nbsp;<\/span><\/p>\n\n\n\n<div class=\"box box--icon box--info\">\n<p><span style=\"font-weight: 400\">For example, suppose that after your death, two of your children work for the company and show potential while the other two want nothing to do with it. In that case, the trustees can decide to later give them the shares outright and to enjoy the dividend payments in the meantime. This might be hard for you to predict while you are alive.&nbsp;<\/span><\/p>\n<\/div>\n\n\n\n<p><span style=\"font-weight: 400\">Alternatively, trustees of a discretionary trust can determine how to apply the income from the shares (i.e. the dividend payments) to the beneficiaries. For example, suppose you have young grandchildren. Likewise, you want to ensure that their needs are looked after in the future, but you are unsure what these needs will be. According to your grandchildren&#8217;s needs, a trustee can decide to apply as much or as little of the <a href=\"https:\/\/legalvision.co.uk\/startups\/im-a-startup-founder-when-start-paying-myself-salary\/\">dividends<\/a>.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400\">Like fixed trusts, you can structure discretionary trusts in tax-efficient ways to transfer property so that, for instance, your shares are not subject to substantial inheritance tax.\u00a0<\/span><br><\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span style=\"font-weight: 400\">What Discretionary Trusts Cannot Do<\/span><\/h3>\n\n\n\n<p><span style=\"font-weight: 400\">Importantly, a discretionary trust cannot override how a <a href=\"https:\/\/legalvision.co.uk\/corporations\/articles-of-association\/\">company itself is governed<\/a>. It is not a substitute for determining how others will run your business after you are no longer in charge.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400\">Therefore, your company should have a succession plan in place before you retire or are no longer capable of managing the company. Skilled solicitors can help ensure that the interests of your company align with your estate planning. For example, having trustees as company directors can be beneficial to ensure they run your business in a way that falls within your family\u2019s best interests.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400\">How to Create a Discretionary Trust&nbsp;<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400\">The law requires that all trusts be sufficiently certain. Otherwise, in a dispute, the courts may not be willing to recognise the trust. In such a case, the trust property, including shares in your company, will either:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">revert to you; or<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">if you are no longer alive, ownership will pass according to probate and estate laws.&nbsp;<\/span><\/li><\/ul>\n\n\n\n<p><span style=\"font-weight: 400\">In either case, this may be at odds with your intentions. Therefore, to ensure that your trustees can follow your wishes, it is important to seek the advice of a solicitor when creating a trust.<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400\">That said, the actual process of creating a trust is fairly straightforward. You simply need to:<\/span><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">declare your intention to create a trust;&nbsp;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">ensure that the group of people, such as your family, are sufficiently certain enough to be recognised by the law;&nbsp;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">declare the property that the trust is to hold;&nbsp;&nbsp;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">ensure that you record all the particulars as to how your trustees should manage the trust; and&nbsp;<\/span><\/li><li style=\"font-weight: 400\"><span style=\"font-weight: 400\">nominate the trustees.&nbsp;<\/span><\/li><\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400\">Key Takeaways&nbsp;<\/span><\/h2>\n\n\n\n<p><span style=\"font-weight: 400\">Discretionary trusts enable the trustees to choose which beneficiaries can benefit from the trust assets. This is in contrast to a fixed trust, where the settlor clearly sets out each beneficiary\u2019s interests at the point they create the trust. Notably, trusts are more relevant to estate planning than running a business. So, if you own a business and wish for ownership to stay within the family, creating a discretionary trust over the company&#8217;s ownership can be an effective way to ensure this. It will also provide for more flexibility in the future, such as on what grounds beneficiaries can enjoy the trust property.&nbsp;<\/span><\/p>\n\n\n\n<p><span style=\"font-weight: 400\">If you need help aligning your business\u2019 interests with your estate planning, our <a href=\"https:\/\/legalvision.co.uk\/business-lawyers-lp\">experienced business lawyers<\/a> can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Visit our&nbsp;<\/span><a href=\"https:\/\/legalvision.co.uk\/membership\"><span style=\"font-weight: 400\">membership page<\/span><\/a><span style=\"font-weight: 400\">.<\/span><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span style=\"font-weight: 400\">Frequently Asked Questions&nbsp;<\/span><\/h2>\n\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1640151667421\"><strong class=\"schema-faq-question\"><strong>What is a discretionary trust?<\/strong><\/strong> <p class=\"schema-faq-answer\">A discretionary trust gives the trustees the power to determine how to apply the trust property in favour of the beneficiaries. They are more flexible than fixed trusts because the trustees can exercise their powers according to the individual circumstances of each beneficiary as the trustee sees fit.\u00a0<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1640151678743\"><strong class=\"schema-faq-question\"><strong>Can I be the trustee of a discretionary trust?<\/strong><\/strong> <p class=\"schema-faq-answer\">In short, yes, you can. However, be aware that the law holds you to the standards of all other trustees. When you transfer the beneficial interest of the trust property, including your company shares, to the beneficiaries, you must act with their best interests in mind. This means you will no longer have a beneficial interest in the company\u2019s shares. Therefore, as an example, you would not be able to pay yourself the dividends.\u00a0<\/p> <\/div> <\/div>\n<div class=\"not-prose m-feedback-prompt\">\n    <!-- Thumbs up\/down bar -->\n    <div class=\"m-feedback-prompt__main\">\n        <div class=\"m-feedback-prompt__title\">Was this article helpful?<\/div>\n        <div>\n            <!--span class=\"m-feedback-prompt__button--text\">Thanks!<\/span-->\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--yes\"\n                    data-analytics-link=\"feedback-prompt:yes\" aria-label=\"Agree\">\n                <i class=\"fa-regular fa-thumbs-up fa-3x\"><\/i>\n            <\/button>\n            <button type=\"button\" class=\"m-feedback-prompt__button m-feedback-prompt__button--no\"\n                    data-analytics-link=\"feedback-prompt:no\" aria-label=\"Disagree\">\n                <i class=\"fa-regular fa-thumbs-down fa-3x\"><\/i>\n            <\/button>\n        <\/div>\n    <\/div>\n\n    <!-- Feedback form -->\n    <div class=\"m-feedback-prompt__form\">\n        <div class=\"m-feedback-prompt__form--thanks \">\n            <div>Thanks!<\/div>\n            <p>\n                We appreciate your feedback \u2013 your submission has been successfully received.            <\/p>\n        <\/div>\n        <form id=\"contact-form\" class=\"m-feedback-prompt__form--form\" action=\"\" method=\"post\">\n            <input type=\"hidden\" id=\"authenticity_token\" name=\"authenticity_token\" value=\"9eb4f72322\" \/><input type=\"hidden\" name=\"_wp_http_referer\" value=\"\/api\/wp\/v2\/posts\/882\" \/>            <input value=\"https:\/\/legalvision.co.uk\/business-structures\/discretionary-trust\/\" type=\"hidden\" name=\"currenturl\"\n                   id=\"currenturl\">\n            <input value=\"How Do I Set Up a Discretionary Trust in England and Wales?\" type=\"hidden\" name=\"currenttitle\"\n                   id=\"currenttitle\">\n            <label>\n                <!-- display on thumbs-up -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--yes\">\n                    Can you tell us <span class=\"font-semibold\">why<\/span> you found it helpful?\n                <\/span>\n\n                <!-- display on thumbs-down -->\n                <span class=\"m-feedback-prompt__feedback m-feedback-prompt__feedback--no text-lg\">\n                    How can we better improve this article?\n                <\/span>\n                <textarea name=\"feedbackmessage\" id=\"feedbackmessage\" required><\/textarea>\n            <\/label>\n\n            <div class=\"m-feedback-prompt__form--error\" id=\"form-submit-error\"><\/div>\n            <button id=\"submit-contact-form-button\" type=\"submit\" name=\"commit\" class=\"m-feedback-prompt__form--submit\"\n                    data-analytics-link=\"feedback-prompt:submit\">\n                Submit            <\/button>\n        <\/form>\n    <\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>You may be familiar with the concept of trusts, and a discretionary trust may be relevant for your business. You will find that discretionary trusts have limited use in running a business. Still, they can effectively keep your business within the family or friends as part of your estate planning. This article will explain the<a href=\"https:\/\/legalvision.co.uk\/business-structures\/discretionary-trust\/\">Continue reading <span class=\"sr-only\">&#8220;How Do I Set Up a Discretionary Trust in England and Wales?&#8221;<\/span><\/a><\/p>\n","protected":false},"author":13461,"featured_media":580,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_relevanssi_hide_post":"","_relevanssi_hide_content":"","_relevanssi_pin_for_all":"","_relevanssi_pin_keywords":"","_relevanssi_unpin_keywords":"","_relevanssi_related_keywords":"","_relevanssi_related_include_ids":"","_relevanssi_related_exclude_ids":"","_relevanssi_related_no_append":"","_relevanssi_related_not_related":"","_relevanssi_related_posts":"2168,1010,3828,2376,888,1001","_relevanssi_noindex_reason":"","editor_notices":[],"footnotes":""},"categories":[36],"tags":[20,21,86,87,88],"class_list":["post-882","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business-structures","tag-small-business","tag-medium-business","tag-discretionary-trust","tag-estate-planning","tag-trust-deed"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.1.1 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Setting Up a Discretionary Trust in England and Wales | LegalVision UK<\/title>\n<meta name=\"description\" content=\"Discretionary trusts enable the trustees to choose which beneficiaries can benefit from the trust assets. 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