Rainy Day Trusts

What Is a Rainy Day Trust Trying to Achieve?

The defining objective of a Rainy Day Trust is conditional access.

The settlor does not want assets to be enjoyed as a matter of course, but instead wishes to ensure that funds are available to deal with:

Financial emergencies
Illness or incapacity
Relationship breakdown
Business failure
Loss of income
Unexpected care or support needs

In short, the trust exists just in case.

Why a Discretionary Trust Is the Natural Fit

A Discretionary Trust is usually the most appropriate legal structure for a Rainy Day Trust because:

No beneficiary has an automatic entitlement
Trustees decide whether, when, and how much to distribute
Assets can remain untouched indefinitely
Distributions can be targeted to genuine need

This aligns perfectly with the “rainy day” concept: the trust is there as a safety net, not a source of regular benefit. In addition, discretionary trusts allow trustees to take account of circumstances that could not be predicted when the trust was created.

Typical Structure of a Rainy Day Trust

A Rainy Day Trust will usually involve:

A class of beneficiaries (often the settlor, spouse, children, or wider family)
Trustees with wide discretionary powers
A letter of wishes explaining when the trust should be used and when it should not
Assets that are intended to remain outside day-to-day spending

The trust deed is often drafted conservatively, with the letter of wishes doing much of the practical guidance.

Common Uses in Planning

Rainy Day Trusts are often used where individuals want to:

Ring-fence capital without committing to permanent gifting
Protect assets from foreseeable but uncertain risks
Retain a degree of indirect access if circumstances deteriorate
Avoid assets being treated as immediately available resources

They are frequently encountered in later-life planning, business-owner planning, and family protection strategies.

Could a Power of Appointment Be Used Instead?

A power of appointment can sometimes be part of a Rainy Day Trust arrangement, but on its own it is rarely sufficient.

Power of Appointment – What It Does Well

A power of appointment allows trustees (or another power-holder) to:

Decide which beneficiaries receive capital
Determine the proportions and timing
Alter future entitlement

This can be useful where flexibility between beneficiaries is the main concern.

Why It Is Usually Not Enough by Itself

However, a power of appointment does not remove entitlement in the same way a discretionary trust does. If beneficiaries already have fixed or presumptive rights, the “rainy day” function is weakened.

In practice:

A power of appointment is often layered onto a discretionary trust
It enhances flexibility but does not replace discretion

So while powers of appointment are useful tools, they are complements, not substitutes, for a true Rainy Day Trust structure.

When carefully drafted, a Rainy Day Trust provides reassurance, resilience, and control—ensuring that assets are available when genuinely needed, and untouched when they are not.

HMRC Tax Position (Overview)

From a tax perspective, Rainy Day Trusts implemented as discretionary trusts fall within the relevant property regime:

Lifetime transfers into the trust are usually Chargeable Lifetime Transfers
The trust may be subject to:
- Ten-year periodic charges (up to 6%)
- Exit charges on distributions
Trust income is taxed at trust rates
Capital gains are taxed at trustee rates with a limited annual exemption

This tax cost is the trade-off for flexibility and protection. Rainy Day Trusts are therefore most appropriate where the risk management benefits outweigh the tax complexity.

Control, Access, and Settlor Involvement

One of the most sensitive issues with Rainy Day Trusts is the settlor’s relationship to the trust.

Care must be taken to ensure that:

The trust is genuinely discretionary
The settlor does not retain prohibited levels of control
Any potential future benefit to the settlor is carefully structured

Poor drafting in this area can undermine both the planning objective and the tax position.

When a Rainy Day Trust Is Appropriate

Rainy Day Trusts are most suitable where:

The future is genuinely uncertain
Immediate gifting is undesirable
Protection matters more than tax efficiency
Flexibility is a priority
Assets are intended as a last resort rather than first resort

They are not designed for routine income or lifestyle funding.

How CHC Legal Assists

CHC Legal assists with Rainy Day Trust planning by:

Clarifying whether a contingency-based trust is appropriate
Designing discretionary trust structures aligned to “last resort” use
Drafting trust deeds and letters of wishes with precision
Ensuring powers of appointment are used appropriately
Coordinating Rainy Day Trusts with wider estate, tax, and care planning

Our focus is on ensuring that the trust functions exactly as intended: dormant when things are going well, responsive when they are not.

Summary

A Rainy Day Trust is best understood as a planning philosophy implemented through a discretionary trust structure. While powers of appointment can enhance flexibility, true contingency planning requires discretion, not entitlement.