Discretionary Trust
A trust where trustees decide who receives what from a pool of potential beneficiaries. Offers flexibility but has specific tax rules.
A discretionary trust gives trustees the power to decide how trust assets are distributed among a class of potential beneficiaries. No beneficiary has an automatic right to anything.
How It Works
The settlor specifies a class of beneficiaries (e.g., "my children and grandchildren") rather than fixed shares. Trustees then decide:
- Who receives distributions
- How much they receive
- When they receive it
- Whether to pay income or capital
When Discretionary Trusts Are Used
- Protecting assets from beneficiaries' creditors or divorcing spouses
- Providing for beneficiaries who can't manage money
- Flexibility for changing family circumstances
- Tax planning across generations
- Protecting means-tested benefits
Tax Treatment
- Inheritance tax may apply when assets enter (potentially 20%)
- 10-yearly periodic charges (up to 6%)
- Exit charges when assets leave
- Income taxed at trust rate (45%) until distributed
Common questions
Are discretionary trusts tax efficient?
They can be, but have complex tax rules including potential entry charges and 10-yearly charges. Professional advice is essential.
Can beneficiaries demand money from a discretionary trust?
No. Beneficiaries have no automatic entitlement - trustees have complete discretion over distributions.
Who should be trustee of a discretionary trust?
Often the settlor plus a trusted family member or professional trustee. At least two trustees is common.
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