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Discretionary Trust

Discussion in 'Investing Glossary' started by Glossary, 27th Sep, 2006.

  1. Glossary

    Glossary Active Member

    12th Sep, 2006

    Although the term discretionary trust is commonly used it does not have a precise legal meaning. What is usually meant by the term is a trust where the entitlement of the beneficiaries to both the income and the capital of the trust is not immediately ascertainable or certain. Instead the trustee (or potentially some other person) will select to whom distributions, if any, are made each financial year.

    The key difference between discretionary and "fixed" trusts is that the beneficiaries have no proprietary interest in the trust assets and merely have the right to have the trust properly administered according to its terms. Instead the trustee has the flexibility from year to year to determine to whom income and capital should be distributed so as to achieve the best outcome from a tax perspective. This ability to "stream" distributions is one of the key advantages of a discretionary trust.

    Somewhat ironically the very limited nature of a beneficiary's interest under a discretionary trust is what makes this form of trust such a powerful asset protection tool.

    See also:
    Last edited by a moderator: 27th Sep, 2006