Discretionary Trusts Explained
A discretionary trust is one in which the trustees have been given discretion (allowed to decide / choose) about how to best use the assets placed in the trust. Permission for a discretionary trust must be decided by the donor upon setting up the trust and written into the legally binding trust deeds.
As in any trust, the chosen trustees are legally responsible for the assets, such as money, property or land, held in a trust. The trustees also manage the trust in the best interests of the beneficiary. In a discretionary trust, the trustees will be able to decide about the best way of using the trust's income as well as the capital.
Trustees in a discretionary trust may be able to decide on:
- Who will be entitled to the assets (who the beneficiaries will be).
- The proportion of income, capital or assets paid out to beneficiaries.
- The frequency and mode of payments made to the beneficiaries.
- What the conditions of the trust's deeds are, i.e. money given to a beneficiary may solely be used for educational purposes.
- If they would also like to add additional income into the discretionary trust, known as an accumulative trust.
Discretionary trusts are a more flexible option compared to an irrevocable trust. They are often used within family trusts in case of changing circumstances in the future. For instance, if a child has a degenerative illness the trust deed's may need to be altered accordingly to best accommodate for those child's needs such as medical fees. If, how, and when the trust is altered will be entirely up to the trustee's discretion.
The circumstances surrounding trusts and their deeds are inherently unique and consequently they have complex areas of taxation. Setting up a discretionary trust and deciding how to manage it may be best made through seeking impartial advice from an independent financial advisor:
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