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.
Puerto Rico 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
As mentioned previously, up to $2,600 of taxable income of a trust can be accumulated in the trust and taxed at the 10% tax rate (based on 2019 tax brackets), thus avoiding the kiddie tax, if applicable, on income distributions to a child.
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 you set up a Discretionary Trust, you identify a class of beneficiaries such as children and/or grandchildren who can receive capital and/or income from the trust at the discretion of the Trustees. No one beneficiary has an absolute entitlement to either income or capital.
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.
Disadvantages of a Discretionary TrustComplexity in establishing and maintaining a trust structure.Only profits (not losses) are distributed.Vesting date: in NSW, trusts generally end after no more than 80 years; extending this date requires foresight in drafting the trust, otherwise, you may face costly court action.More items...?
Key TakeawaysTrust beneficiaries must pay taxes on income and other distributions that they receive from the trust. Trust beneficiaries don't have to pay taxes on returned principal from the trust's assets. IRS forms K-1 and 1041 are required for filing tax returns that receive trust disbursements.
Primary tabs. A discretionary trust is a trust that contains a provision giving the trustee discretion to pay to the beneficiary only so much of the income and principal of the trust property as the trustee sees fit.
Discretionary distribution means a distribution which the trustee is not directed to make, but is permitted to make in the trustee's discretion. For example, the language in a trust instrument providing for a discretionary distribution may contain the words "may" or "in the trustee's discretion".
A trust distribution is a payment or other distribution of trust assets made by a trustee to one or more trust beneficiary.
Beneficiaries of a trust typically pay taxes on the distributions they receive from the trust's income, rather than the trust itself paying the tax. However, such beneficiaries are not subject to taxes on distributions from the trust's principal.