While the UK government has guaranteed bank deposits of up to £50,000, the beneficiaries of discretionary trust funds may not benefit, warns Sussex law firm Adams & Remers.

The warning follows enquiries made by the firm to the Financial Services Authority, the UK's financial regulator, questioning how the beneficiaries of discretionary trusts will be treated by the Financial Services Compensation Scheme.

This issue centres on the way that discretionary trusts are set up, and how they work in practice.  It is common for discretionary trusts to list a class of beneficiary, such as ‘children’ or ‘grandchildren’, rather than to name specific individuals.  This grouping together may mean that the government’s deposit guarantee may, in reality, become significantly diminished.  “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,” said Susan Midha, partner at Adams & Remers.

While splitting the £50,000 protection level equally might seem to be straightforward, ambiguity is also caused by the way that funds from discretionary trusts are distributed.  Ms Midha said: “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 10 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.”

Complications could also arise if a beneficiary holds a bank account in their own name with the same bank, or banking group, as that of the trust.  It appears that the FSCS aggregates the assets in both accounts so that beneficiaries do not receive more than £50,000 of protection, according to Adams & Remers.

The law firm called for the FSA to publish clear guidelines to clarify where clients stood, and urged those who might be affected to proactively seek information. “People need to find out as much as they can if they are either a trustee or a beneficiary of a trust to ensure they are covered for any consequences,” said Ms Midha.