Discretionary Trust


Introduction

Managing assets requires professional experience and legal advice. Discretionary trust is something that offers just that. It like a tree hierarchy where the trustee heads the trust and the beneficiaries follow.

The trustee decides the number of beneficiaries this legal arrangement should have. As fiduciary duty is one of the main attributes of discretionary trust, the trustee acts in the best interests of the parties.

Meaning of Discretionary Trust

A discretionary trust is a legal arrangement in which a trustee holds and manages assets on behalf of beneficiaries. The trustee can distribute income and capital from the trust to the beneficiaries, but they are not entitled to fixed gains. Meaning, the trustee can decide when and how much income or capital should be distributed to each beneficiary.

How does Discretionary Trust work?

A trustee must be appointed to manage the trust's assets before setting up a discretionary trust. A deed is created with a set of terms and conditions that needs to be followed, including the beneficiaries' identity and the way distributions are processed.

Then, the trustee manages the assets and distribute them to the beneficiaries accordingly. The trustee must ensure that there won’t be any bias treatment to any beneficiary and keep all the interests at heart whilst making informed decisions.

Some of the factors considered when making distributions includes the beneficiaries' financial needs, health, and age.

Benefits of Discretionary Trust

Given below are the benefits of discretionary trust −

  • One of the key benefits of a discretionary trust is the flexibility it offers. The trustee has the power to alter the hierarchy as per the circumstances.

  • A discretionary trust can be particularly useful for families with young children or beneficiaries with special needs or someone who wants to avoid probate

  • Another benefit of a discretionary trust is tax efficiency. By making distributions to beneficiaries with a lower tax rate, the trustee can help reduce the beneficiaries' overall tax liability. This can particularly benefit high-net-worth individuals looking to manage their tax liabilities.

  • A discretionary trust can protect family assets from potential legal claims.

  • A discretionary trust can offer privacy for the beneficiaries. As the trust details are not publicly available, beneficiaries can enjoy more privacy than they would with other legal structures.

Purpose of Discretionary Trust

The main purpose of a discretionary trust is to provide flexibility and control over the distribution of assets to the beneficiaries. The trustee has the power to adapt to changing circumstances and make distributions tailored to each beneficiary's individual needs. This means that a discretionary trust can be particularly useful for families with young children or beneficiaries with special needs. The trustee can also consider factors such as the financial needs of the beneficiaries, their health, age, and other personal factors when making distributions.

Tax Aspects of Discretionary Trust

From a tax perspective, a discretionary trust can be a tax-efficient way to manage assets and provide for beneficiaries. By making distributions to beneficiaries with a lower tax rate, the trustee can help reduce the beneficiaries' overall tax liability. This can particularly benefit high-net-worth individuals looking to manage their tax liabilities.

In addition, a discretionary trust can also provide opportunities for tax planning, such as using distributions to reduce the impact of the high-income earner's marginal tax rate. Trust income may also be distributed to beneficiaries at a lower tax rate or to minors, which can help reduce the trust's overall tax liability.

Difference Between Discretionary Trust and Unit Trust

A discretionary trust differs from a unit trust in terms of distribution of assets. The assets are managed by the trustee in the former and disturbed according to their will, whereas in the latter, the assets are distributed as per the number of units held in the trust. In a unit trust, the trustee has no discretion to determine the distribution of income or capital; but in discretionary trust, there’s discretion involved.

Examples of Discretionary Trust

  • Family trust − This is a common example of a discretionary trust set up to benefit family members. It can hold and manage property, shares, and investments.

  • Charitable trust − This trust is set up to benefit a charitable cause or organization. The trustee has the discretion to distribute to various charitable organizations.

  • Asset protection trust − An asset protection trust is set up to protect assets from potential legal claims. The trustee has the discretion to distribute to beneficiaries, but the trust's primary purpose is to protect assets from potential creditors.

Conclusion

A discretionary trust is a flexible and tax-efficient way to manage assets and provide for beneficiaries. A wide range of benefits is provided to set up a discretionary trust. While a discretionary trust can be complex to set up, it can benefit both the trustee and the beneficiaries significantly. It is important to seek professional advice before proceeding with a discretionary trust to ensure it meets your needs and circumstances.

FAQs

Q1. What is a discretionary trust?

Ans. A discretionary trust is a legal arrangement in which a trustee holds and manages assets on behalf of beneficiaries. The trustee can distribute income and capital from the trust to the beneficiaries.

Q2. What is the purpose of a discretionary trust?

Ans. The purpose of a discretionary trust is to provide flexibility and control over the distribution of assets to beneficiaries. The trustee has the power to adapt to changing circumstances and make distributions tailored to each beneficiary's individual needs.

Q3. How does a discretionary trust work?

Ans. A discretionary trust works by appointing a trustee to hold and manage assets on behalf of beneficiaries. The trustee can distribute income and capital from the trust to the beneficiaries based on their needs and circumstances.

Q4. What are the benefits of a discretionary trust?

Ans. The benefits of a discretionary trust include flexibility, tax efficiency, asset protection, and privacy. A discretionary trust can be particularly useful for families with young children or beneficiaries with special needs, as it allows the trustee to tailor distributions to their needs.

Updated on: 26-Apr-2023

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