Discretionary trusts

Dec 10, 2023

Understanding Discretionary Trusts

Discretionary trusts, also known as family trusts, are a popular tool for financial and estate planning. They offer flexibility and control over the distribution of assets, which makes them an attractive option for many individuals and families. However, understanding how they work and their potential benefits and drawbacks is essential before setting one up.

discretionary trusts

What is a Discretionary Trust?

A discretionary trust is a legal arrangement where the trustee holds and manages the trust assets for the benefit of the beneficiaries. The unique feature of a discretionary trust is that the trustee has the discretion to decide who among the beneficiaries will receive the income or capital from the trust and when they will receive it.

Key Features of Discretionary Trusts

Discretionary trusts have several key features that set them apart from other types of trusts. First, they offer flexibility in terms of how the trust income and capital are distributed. The trustee can adjust the distributions based on the beneficiaries' needs and circumstances. Second, discretionary trusts provide a degree of asset protection. Since the assets are held in the trust's name, they are generally protected from the individual beneficiaries' creditors. Finally, discretionary trusts can offer tax advantages, particularly in terms of income splitting and tax planning.

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Setting Up a Discretionary Trust

Setting up a discretionary trust involves several steps, including drafting a trust deed, appointing a trustee, and nominating the beneficiaries. It's important to get legal and financial advice to ensure the trust is set up correctly and meets your needs.

Benefits of Discretionary Trusts

One of the main benefits of discretionary trusts is their flexibility. The trustee can tailor the distribution of the trust income and capital to the beneficiaries' needs, which can be particularly useful in situations where the beneficiaries' circumstances change. Additionally, discretionary trusts can offer significant tax advantages, as the trustee can distribute the trust income in a way that minimises the overall tax liability.

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Drawbacks of Discretionary Trusts

While discretionary trusts offer many benefits, they are not without drawbacks. They can be complex to set up and manage, and there are costs involved. Also, the trustee has a significant amount of responsibility and is subject to a range of legal obligations. Furthermore, while the trust assets are generally protected from the beneficiaries' creditors, they may not be protected in the event of bankruptcy or family law disputes.

Is a Discretionary Trust Right for You?

Whether a discretionary trust is right for you depends on your individual circumstances, including your financial situation, your family situation, and your estate planning objectives. It's important to seek professional advice to understand the potential benefits and drawbacks and to ensure a discretionary trust is the right tool for your needs.

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