Financial Jargon Buster Dictionary

This glossary is provided for information only and is not regulated by the Financial Services Authority.

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Discretionary Trust

This is a type of trust where the trustees can decide who will benefit from the trust and how much they will get.

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 the settlor. Where the discretionary trust is a testamentary trust, it is common for the settlor to leave a letter of wishes for the trustees to guide them as to the settlor's wishes in the exercise of their discretion.

Discretionary trusts can only arise as express trusts. It is not possible for a constructive trust or a resulting trust to arise as a discretionary trust.

Discretionary trusts can be said to be discretionary in two respects. Firstly, the trustees usually have a power to select which beneficiaries payments will be made to from within the class, and secondly, they can select the amount of trust property that the beneficiary receives. Although most discretionary trusts have both types of discretion, it is not necessarily so. It would be perfectly permissible in most legal systems for a trust to have fixed number of beneficiaries and for the trustees to have a discretion as to how much each beneficiary receives, or to have a class of beneficiaries from whom they could select members, but provide that the amount to be provided is fixed. Most well drafted trust instruments also provide for a power to add or exclude beneficiaries from the class; this allows the trustees greater flexibility to deal with changes in circumstances (and, in particular, changes in the revenue laws of the applicable jurisdiction).

Characteristically discretionary trusts relate to a discretionary distribution of income, but in some cases the trustees will also have a power of appointment with respect to capital assets.