A discretionary trust 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 trustor. Discretionary trusts can be discretionary in two respects. First, the trustees usually have the power to determine which beneficiaries (from within the class) will receive payments from the trust. Second, trustees can select the amount of trust property that the beneficiary receives. Although most discretionary trusts allow both types of discretion, either can be allowed on its own. 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.
Michigan Discretionary Distribution Trust for the Benefit of Trustor's Children with Discretionary Powers over Accumulation and Distribution of Principal and Income Separate Trust for each Beneficiary
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FAQ
A discretionary trust gives trustees the power to decide how much beneficiaries get from a trust and when they get it. All capital and income is distributed completely at their discretion. This means there's more flexibility and assets can be protected if circumstances change for any reason.
A 'beneficial owner' is any individual who ultimately, either directly or indirectly, owns or controls the trust and includes the settlor or settlors, the trustee or trustees, the protector or protectors (if any), the beneficiaries or the class of persons in whose main interest the trust is established.
Taxation of beneficiaryA beneficiary will receive income from a discretionary trust as trust income (classed as non-savings income) with a 45% tax credit (shown on the form R185). They can reclaim all or part of this depending on their own tax position.
Trusts effectively separate the legal ownership from the beneficial ownership, which is unique. In nearly every other context the legal and beneficial owners are the same (although there are some exceptions, but not many).
(a) Discretionary beneficiaries have no entitlement to benefit from the Trust, but the Trustees are able, in their discretion, to make distributions of capital and income to them while the trust remains in existence. Final beneficiaries are the people who get what's left in the Trust, when it reaches its end-date.
In the context of a discretionary trust, the class of individuals who are the objects of the trust would be regarded as the beneficial owners, together with the settlor and the trustees.
Beneficiaries are entitled to see legal advice provided it is paid for by the trust fund. beneficiaries may not see legal advice relating to trustees' disputes with beneficiaries; and. if trustees have a controlling shareholding in a company then company documents may be subject to disclosure.
It is the generally accepted view that an object of a discretionary trust does not have a proprietary interest in the property of the trust they only have the right to compel the due administration of the trust estate and the right to be considered by the trustee. This is often described as a mere expectancy.
When executing their trust, settlors generally name themselves as the sole trustee and beneficiary while they are living; this allows them to exercise full control over the trust and its assets during their lifetime, as well as to withdraw trust funds as they see fit.
In a discretionary trust, the trustee has complete discretion in distributing income and/or principal to a designated beneficiary or a class of beneficiaries. There are no specific rules or standards. The settlor of the trust, however, could provide guidance.