A Discretionary Trust is a form of trust which can be set up by an individual or couple (the settlor or settlors). In the United Kingdom, for example, the Finance Act 1975 imposed a "capital transfer tax" on any property settled on a discretionary trust, which was replaced in the Finance Act 1988 by the inheritance tax. It is sometimes referred to as a family trust in Australia or New Zealand. The trustees can distribute to the beneficiary as and when appropriate. Where the discretionary trust is a testamentary trust, it is common for the settlor (or testator) to leave a letter of wishes for the trustees to guide them as to the settlor's wishes in the exercise of their discretion. How a Discretionary Trust Can Block Creditors There is nothing worse than realizing that your estate may be placed into the hands of your irresponsible child’s creditors. With this type of trust, the trustee makes the decisions as to who the beneficiaries will be and how much they will get. Whilst the beneficiaries will have standing to sue the trustees for failing to fulfill their duties, it is not clear that they would gain by such action. Each beneficiary of a discretionary trust, in contrast, is dependent upon the trustees to exercise their power of selection favourably. Protecting benefits of a disabled beneficiary. Setting up a trust is a safe way of protecting your money for the future. What is a discretionary trust? Protecting a beneficiary’s money if they are financially unstable. Because under a discretionary trust, no one beneficiary could be said to have title to any trust assets prior to a distribution, this made discretionary trusts a powerful weapon for tax planners. Although not legally binding, the Letter of Wishes states the settlors wishes and purpose of the trust. If you would like more information on Discretionary Trusts or any other trust, we can help. We sell online Discretionary trust deed where the trustee can make a family trust election with the ATO. Where the discretionary trust is a testamentary trust, it is common for the settlor (or testator) to leave a letter of wishes for the trusteesto guide them as to the settlor's wishes in the exerc… An introduction to discretionary trusts A trust is a legal arrangement used to protect assets, such as land, buildings or money for the benefit of the “beneficiaries” to the trust. When a trust is created “trustees” are appointed. A list of members is available at the registered office. The trustees must choose from the class of beneficiaries that are named in the trust, however, none of the beneficiaries have an automatic right to receive proceeds from the trust. Discretionary trusts can only arise as express trusts. Although there are clearly duties, it is less clear whether there are any correlating rights. This field is for validation purposes and should be left unchanged. For example, if a creditor was to pursue the assets of a beneficiary, trust property is generally protected because the trustee is the legal owner. Characteristically, discretionary trusts provide for a discretionary distribution of income only, but in some cases the trustees also have a power of appointment with respect to the capital in the trust, i.e. This is because the beneficiary is not absolutely entitled to the trust funds. This can mean protection from the beneficiary’s poor money-management skills, extravagant spending habits, personal or professional judgment creditors, or divorcing spouse. What are the differences between them all? Two or more trustees manage the assets held in the trust for a number of potential beneficiaries. This can have significant advantages. A settlor usually prepares a Letter of Wishes for the trustees setting out how the Discretionary Trust should be dealt with. The trust is managed by appointed trustees who decide which people become beneficiaries and when and how they should receive inheritance from the trust. OC316402. It had been held that beneficiaries under a discretionary trust could do so,[6] although that authority was decided pre-McPhail v Doulton, where to be valid the trustees had to be able to draw up a "complete list" of beneficiaries. There must be at least two beneficiaries named in a Discretionary Trust. Tax saving reasons. A Discretionary Trust is a form of trust which can be set up by an individual or couple (the settlor or settlors). In a discretionary trust, the ‘trustees’ are the legal owners of any assets – known as ‘property’ – held in the trust. Inevitably, the surge in popularity has led to a legislative response in most jurisdictions, thus in many countries there are now considerable tax disadvantages to discretionary trusts, which has predictably hampered their use outside the scope of charitable trusts. A Discretionary Trust has many uses such as: Anyone can act as a trustee including a beneficiary or the settlor of a trust set up during the settlors lifetime. The discretionary trusts mean that during the trust period (typically 125 years from the testator’s death) the trustees have discretion over how the assets in the trust and their income are distributed amongst the beneficiaries. Letters of wishes are not legally binding documents. However, there are many different types of trusts available. What is a discretionary trust? A discretionary trust is typically used for the purpose of avoiding creditors, exercising control over a minor beneficiary, and caring for an incapacitated surviving spouse. This is because the trustee has the discretion to change the arrangements of the trust at any time. They still continue to be used for these reasons, among others: The popularity of discretionary trusts rose sharply after the decision of the House of Lords in McPhail v Doulton [1971] AC 424 where Lord Wilberforce restated the test for certainty of objects in connection with discretionary trusts. They are responsible for running the trust for the benefit of the beneficiaries. The trust then fell dormant, and after several more years, the trustees sought directions. In a Discretionary Trust, trustees have the power to select which beneficiaries can benefit from the trust. The trust interest amounts of beneficiaries are not set by the settlor in a discretionary trust. Discretionary Trust. Such assets are known as “trust property”. A discretionary trust, in the trust law of England, Australia, Canada and other common law jurisdictions, is a trust where the beneficiaries and/or their entitlements to the trust fund are not fixed, but are determined by the criteria set out in the trust instrument by the settlor. It is sometimes referred to as a family trust in Australia or New Zealand. It is permissible in most legal systems for a trust to have a fixed number of beneficiaries and for the trustees to have discretion as to how much each beneficiary receives,[1] or to have a class of beneficiaries from whom they could select members, but provide that the amount to be provided is fixed. A discretionary trust is designed to protect your loved ones from losing their inheritance to creditors, irresponsible spending or other means. It’s also well-suited for family businesses because it maintains a high degree of flexibility and protection for beneficiaries. 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