A discretionary trust is a trust which provides that the capital and income are to be distributed at the Trustees discretion.
The proposed beneficiaries of a Discretionary Trust are usually of a wide class, for example children, grandchildren, their respective spouses etc. None of the beneficiaries has any right to any monies from the trust and the Trustees have absolute discretion as to how to distribute the capital and income of the trust.
A discretionary trust is usually set up for the maximum period permitted by trust law subject to the discretionary powers of the Trustees to terminate it at some earlier time.
The Trustees will usually pay careful attention to the wishes of the Settlor (the person who sets up the trust) in all matters on which they have discretionary powers, provided that those wishes do not conflict with their duties as trustees. The Settlor will usually provide a letter of wishes for the trustees to guide them in carrying out their responsibilities. The letter can be updated as family circumstances change.
Where an individual finds it difficult to decide the ultimate destination of his estate, a discretionary trust can be useful in postponing a choice until the situation actually arises. The individual can make a Will settling his estate (or part of it) on discretionary trusts specifying in the definition of beneficiaries a whole range of persons to cover all possibilities. The Trustees can then, within two years of the death, either act on any informal letter or memorandum of wishes left behind by the Testator in the choice of beneficiaries and the amount to be given to each of them or alternatively they can make the decision themselves in the light of the circumstances. The choice of Trustees by the Settlor is obviously very important in view of their wide discretionary powers.
Discretionary trusts can also be used to ensure long term protection of family assets by lending assets to beneficiaries for immediate use but recalling them into the trust if they are at risk. For example Trustees can lend money to a beneficiary to buy a house but require its repayment if the beneficiary’s marriage breakdown, preventing the assets being lost in the divorce. The trusts can also be used to shelter the increase in value in assets between the deaths of two spouses. For more information please see our guide ‘Nil Rate Band Trusts Explained’.