Discretionary Trust

valueman1

As this is a money saving site I was hoping to see if anyone had experience either as a settlor, trustee or beneficiary of a discretionary trust who might be able to provide suggestions for keeping future costs down.  I would get the trust set up by a trust lawyer.  As the trust would probably last for decades I would want to keep the running costs down.

valueman1

I'm trying to protect my family beyond the grave.

dont_look_now

valueman1 said:

I'm trying to protect my family beyond the grave.

I completely disagree with your mindset here. Your children's future spouses will be part of your family, not alien parasites. And the main circumstances in which they might be awarded large settlements by a divorce court are where they are bringing up your grandchildren.

valueman1

Say I give my son the money, he buys a house and gets married.  If he divorces his wife might get the house entirely or say 70% of the equity in it.  My son would be left with almost nothing.  If I lend via a trust, the loan will be repayable to the trust and he won't be left destitute, will be able to buy a new home and have a fresh start with his children.

Doneby55

I agree with others here that setting up a discretionary trust to operate in this way will be complex and expensive. I've not come across any company I'd trust in a matter like this.  Also not clear if your son already has a partner and looking to buy somewhere together jointly, or this is a hypothetical situation? Though either way there are probably simpler and cheaper options such as exploring them being tenants in common with unequal shares etc. 

valueman1

Thanks Doneby55.  Tenants in common wouldn't protect my son in a divorce situation, the judge would disregard.  A trust loan is much more effective in this case.

Doneby55

valueman1 said:

Thanks Doneby55.  Tenants in common wouldn't protect my son in a divorce situation, the judge would disregard.  A trust loan is much more effective in this case.

Fair enough.  I still think that it may constrain your son's options. E.g. would the trust loan money to buy the house outright? If so what would his partner do? Contribute to bills only? Or if not purchased outright, good luck finding a mortgage with a deposit in the form of a loan, whatever the source...etc etc.

And I don't believe there is a reputable service out there that would do this, and certainly not cheaply, given the range of skills required and the complexity of such setups. If it were me, I'd be looking for a trusted family member. But even that could be fraught with problems. I'd certainly not want to do it...

dont_look_now

valueman1 said:

Say I give my son the money, he buys a house and gets married.  If he divorces his wife might get the house entirely or say 70% of the equity in it.  My son would be left with almost nothing.  If I lend via a trust, the loan will be repayable to the trust and he won't be left destitute, will be able to buy a new home and have a fresh start with his children.

A divorce court will prioritize making sure both of the parties, and their children, have an adequate standard of living, including their housing. If there are children, and one parent has primary responsibility for them, they will often get to stay in the matrimonial home, at least until the children are grown up. A court could order that, even in the case when the other parent continues to own the home (including with an interest-free loan from your trust). So your basic aim may fail here. Why do you not appear to care whether your grandchildren will have the best possible housing while they're growing up? (And you can't make the court give custody of the grandchildren to your son, if that's what you had in mind.)

There are other problems with your approach. What if your children want to use some capital to start a business? They can't, because it's only available to buy a home (and they couldn't borrow against the part of the value of the home which will need to be repaid to the trust).

What if, when your children are old, they want to sell their home to pay for a very expensive care home. Oh, but they can't, because if they sell it, the money has to go back to the trust.

In general, you can't make sensible decisions in advance using a formula. You have to trust somebody else to use their judgment after you have passed on. That person (or persons) could be professional trustees, but they could also get it wrong, and they would have an interest in continuing the trust as long as possible, so that they would continue to draw their fees. So why not trust your children?

valueman1

Discretionary trusts are very common, I haven't come up with anything new here and they often lend on property for the reasons I have given.  The trust loan would have a charge behind the main mortgage if there was one.
I think typically people use their family lawyer to run these trusts, I imagine the running costs would be high so only justified if the sum is substantial.

Doneby55

Quite. So if the amount is large enough that you're talking of family lawyers, there is your answer. Basically, you can't do this on the cheap and it's not worth in unless we're talking something in the multiple millions where bespoke solutions become an option. For less than a £million or two minimum, don't bother. And even if you do, don't blame anyone on an anonymous internet forum when legal disputes cost more than any money saved or preserved!