Very few of us want our family to get embroiled in an inheritance dispute after our death. They can be expensive, divisive and emotionally draining. Social media abounds with advice about ways to avoid a dispute, and one of them that caught my eye recently on TikTok was the suggestion that a ‘discretionary trust’ can prevent post death arguments over an estate.

Is that true? Well, yes and no!

What is a discretionary trust?

A trust is a way of managing assets (money, investments, land or buildings) for people. There are different types of trusts, and they are taxed differently. Trusts involve:

• the ‘settlor’ – the person who puts assets into a trust
• the ‘trustee’ – the person who manages the trust
• the ‘beneficiary’ – the person who benefits from the trust

Trusts are set up for a few reasons, including:

• to control and protect family assets
• when someone is too young, or incapacitated, to manage their affairs
• to pass on assets while you’re still alive
• to pass on assets when you die (a ‘will trust’)

A discretionary trust is where the trustees can make certain decisions about how to use the trust income, and sometimes the capital.

Depending on the trust deed, trustees can decide:

• what gets paid out (income or capital)
• which beneficiary to make payments to
• how often payments are made
• any conditions to impose on the beneficiaries

Discretionary trusts are sometimes set up to put assets aside for:

• a future need, like a grandchild who may need more financial help than other beneficiaries at some point in their life
• beneficiaries who are not capable or responsible enough to deal with money themselves

They are often accompanied by a letter of wishes, where the settlor explains what they want the trustees to do. That letter is not binding in law. It can be an easy way out for the settlor – they leave the big decisions to others to make after they have died.

So how does a discretionary trust impact on a claim against an estate?

After someone has died, certain individuals have the right to bring a claim against the deceased’s estate. They can do this under the Inheritance (Provision for Family and Dependents) Act 1975  (the Act) if they believe that a will  – or intestacy if there’s no will – has failed to make ‘reasonable financial provision’ for them.

In the 1987 case of Rajabally v Rajabally, a husband left the matrimonial home to his wife and 3 sons in equal shares on trust. The sons gave non legally binding assurances to the widow that she could live in the property. The widow brought a claim under the Act against her late husband’s estate. The court found that the widow’s lack of security made the provision for her unreasonable. The case is authority to argue that the use of a trust may make provision for a claimant ‘insecure’ and therefore unreasonable.

That’s even more the case where there is a discretionary trust and the claimant is dependent on the trustees’ exercise of their discretion. It’s very difficult to challenge trustees’ decision making because their reasoning process is confidential. In the case of Cowan v Foreman in 2019, a judge was unsympathetic to a widow who argued that a discretionary trust was not reasonable provision because she was at the mercy of trustees and lacked security. He concluded that there was no evidence that the trustees would defy the letter of wishes. The judge seemed to think, incorrectly, that if the trustees did fail to comply with the letter of wishes, that would be a breach of trust and the widow could sue them.

On appeal, that decision was overruled and the widow was successful.

However, a cautionary note is sounded in the case of Ramus v Holt, 2022. The claimant was again a widow, Mrs Ramus, aged 77. She had been married to the deceased for 48 years and they had 2 children. She was a beneficiary of a discretionary trust. Her daughter was a trustee and beneficiary, and the other two trustees were independent. They had the power to exclude her as a discretionary beneficiary.  Mrs Ramus was worried about friction with the trustees, and particularly her daughter – she didn’t think her daughter would be willing to make sufficient provision for her. She asked the court to make an order that she could not be removed as a beneficiary plus either an order that she should receive a minimum fixed sum from the trust each month, or an order to replace the trustees.

Mrs Ramus failed in her claim. The judge considered that the trustees had a clear understanding of their obligations and that they would all carry out the deceased’s wishes, as set out in his letter of wishes.

The context is relevant here, in that Mrs Ramus had assets of her own of over £1.6m.

The judge made it clear that the court had no jurisdiction to remove trustees of an existing settlement under the Act; only to appoint trustees of a new settlement.

Can a discretionary trust be a remedy in a claim under the Act?

This is an important point; yes. In cases where a successful claim is brought under the Act a discretionary trust can be created by the court to make reasonable financial provision for the claimant, especially where the claimant is receiving means tested benefits and the judge wants to preserve that entitlement for them.

Summary; will a discretionary trust prevent a will dispute?  

Clearly not, as the cases referred to above make clear! Equally, trusts can be an effective tool in estate planning, and the key is always to get expert advice about what you are trying to achieve and why. Avoiding litigation isn’t always possible. But you may reduce the risk of a claim if you get advice, carefully consider your options and ideally, discuss them in advance with your loved one.

Sarah Young – Director & Solicitor