The beneficiaries of discretionary trusts may not benefit from the government’s £50,000 deposit safeguards, says Sussex law firm Adams & Remers.

The warning follows enquiries the firm has made on behalf of its clients to the Financial Services Authority questioning how the Financial Services Compensation Scheme (FSCS) £50,000 guarantee will treat the beneficiaries of such trusts.

Susan Midha, partner at Adams & Remers, says, ‘It is not clear how the FSCS will divide up the protection for each beneficiary of a discretionary trust.

‘In such a trust, it is up to the trustees to decide how to benefit each of the beneficiaries, if at all. It would be unfair to say that there are ten beneficiaries so they should all have £5,000 of protection, because it may only be one beneficiary that actually ever receives any money from the trust.’

Discretionary trusts are still very popular for inheritance planning and quite often list a class of people, such as children or grandchildren, rather than named individuals.

Midha adds, ‘It appears that in such instances the beneficiaries as a group are jointly entitled to the £50,000 guarantee, no matter how many beneficiaries there are.’

If a beneficiary also holds an account in their own name (or a joint account with another individual) with the same bank, or in another bank but part of the same group (such as Abbey and Cahoot), the FSCS aggregates their assets in both accounts so that they do not receive more than £50,000 of protection.

‘A further complication may be for people who have set up a joint bank account with parents so that if, in the future, the parent finds it difficult to handle their financial affairs, the child can have access to the bank account.

‘Unless proved otherwise, it appears that the FSCS will assume that the funds belong equally to each of the account holders, which could lead to the child receiving less protection than they had anticipated, as they have always treated the entire account as belonging to their parent,’ concludes Midha.

Adams & Remers would urge the beneficiaries of discretionary trusts to check where trust and personal bank accounts are held so they do not exceed the Financial Services Compensation Scheme £50,000 guarantee.