Discretionary trust

A trust is a legal relationship where a trustee is obliged to hold property for the benefit of the beneficiaries. The terms of the obligation are laid out by the trustee and entered into by the trustee and the settlor.

There are two types of express trusts; fixed and discretionary. A discretionary trust is a type of trust where the trustee is allowed to exercise some of their own discretion with regard to the distribution of the trust assets. This discretionary power is derived from either the terms of the trust, or the relevant trust legislation. There are two types of discretion that a trustee may have:

  • Discretion as to beneficiaries, i.e. who to distribute the property to. This is usually confined to a selection within a nominated class of potential beneficiaries: a ‘designated range of objects’. However, sometimes trustees of discretionary trusts may have the ‘power of appointment’ to add persons to this designated range.
  • Discretion as to distribution, i.e. how much is given to each beneficiary.

A trustee may have both of these discretions in a discretionary trust.

There are two further types of discretionary trust depending on the obligation of the trustee. These are:

  • Trust power – where the trustee is obliged to distribute the trust assets
  • Mere/bare power – where the trustee is not obliged to distribute the trust assets
    • Mere/bare power trustees are more accurately classed as donees

Beneficiaries have limited rights in a discretionary trust. They do not have proprietary rights, maintaining only a ‘mere expectancy’ to be considered for nomination by the trustee. Beneficiaries of discretionary trusts are only empowered to compel proper administration of the trust by the trustee according to the trust deed.

Trustees do not need to be transparent with the reasoning behind the allocation of trust assets.