What is a discretionary trust?

A discretionary trust, also known as a family trust, is a type of legal arrangement that gives the trustee the power to decide how the income or capital of the trust is distributed among the beneficiaries. Here are the steps to explain it:

1. Creation: A discretionary trust is created by a settlor, who provides the initial assets or funds for the trust. The settlor appoints a trustee, who is responsible for managing the trust.

2. Trustee's Power: The trustee has the discretion to decide how the assets of the trust are distributed among the beneficiaries. This means that the trustee can choose who will benefit from the trust, how much they will receive, and when they will receive it.

3. Beneficiaries: The beneficiaries of a discretionary trust do not have a fixed interest in the trust. Instead, their interest depends on the trustee's decisions. The beneficiaries can include individuals, companies, or even charities.

4. Purpose: Discretionary trusts are often used for tax planning, asset protection, and succession planning. They can help to reduce tax liabilities, protect assets from creditors, and ensure that assets are passed on to the next generation in a controlled manner.

5. Termination: A discretionary trust usually ends when it has fulfilled its purpose, when the trust assets have been fully distributed, or when the trust period specified in the trust deed has expired.