Shelley Faulkner’s blog - Private Client Law

Shelley Faulkner, Solicitor at AMD Solicitors, Bristol

May 2014  - A blog by any other name ... (oh, and the discretionary trust)

I thought I would share with you my blog-naming woes.  My blog began with the idea that I would share my reflections on work in private client law, having previously practiced in divorce law for 10 years or so.  Now I feel that it is time that my blog, formerly called ‘travels in the land of private client law’, should come of age, and have a new name.

I have a shortlist of rejects, including:

  • tax, trusts and trouble-shooting
  • law and order
  • where there’s a will...
  • postcards from probate

Not inspired I grant you. So, PC law it is. Which does make me sing the advertising jingle of a certain computer-selling shop every time I type it. Unless anyone can very kindly come up with a snappier blog title for me?

Since I last blogged I have been grappling with the extraordinarily complicated detail of the law of trusts in this country, and have sat my STEP (Society of Trust and Estate Practitioners, awarders of hard-earned specialist private client law accreditation) diploma trusts exam. Three hours of furious scribbling in a dark room on unnecessarily difficult points of law while the sun shone and the world went on happily outside.

Discretionary trusts

The conclusion I reached over the months of study was that the most flexible, multi-purpose type of trust is the discretionary trust. A discretionary trust essentially puts funds in the hand of others (the trustees) who are generally free to do as they wish with the funds, in the interests of the chosen class of beneficiaries. 

Discretionary trusts allow the trustees to make sensible decisions in light of the situation of the beneficiaries at the relevant time. By comparison, fixed-interest trusts define who benefits from the trust and when. For example, a trust set up by a husband in his will might provide that the trust income is to be paid to his widow for the rest of her life. On her death the trust funds are to be paid out to the children of the family as each reaches the age of 25. This structure is rigid and (depending on the terms of the trust) may be inflexible. 

For example, say the widow wishes to move closer to her children in London where property prices are higher. She needs capital to meet her housing needs there, but the trustees may be unable to use trust funds to meet these needs. Under a discretionary trust, the trustees can decide whether to pay out the income earned by the trust funds, or the funds themselves, to any of the beneficiaries, as and when they consider that it is in their interests to do so

Choice of trustees

The choice of trustees for a discretionary trust is crucial, in light of the extensive powers they are given, and the wide range of options available to them. The person creating the trust (the ‘settlor’) must be confident that the trustees will make decisions sensibly, reasonably and in good faith, acting exclusively in the interests of the beneficiaries, and ignoring their own personal concerns. 

Letter of wishes

Guidance can be given to the trustees by the settler, in the form of a ‘letter of wishes’. The letter of wishes can give the trustees details of the beneficiaries’ situations in life, family, resources and financial responsibilities.  It can also set out the settlor’s priorities for the trust funds, for example to see that each grandchild receives help with the costs of university education. 

The trustees are not bound to follow the guidance set out the letter of wishes, and they must exercise their own judgment in making decisions on the trust funds. However, the letter of wishes may give invaluable guidance on the settlor’s aims in setting up the trust, and on the background of the beneficiaries for whose benefit the trust has been made.

A discretionary trust allows the trust funds to be used without restrictions which may, with the passage of time, prevent the trustees from being able to make the best use of the trust funds for those for whom they were intended to benefit.

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