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Discretionary trusts (Key aspects are (Role of powers or any protector,…
Discretionary trusts
Key aspects are
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Void, voidable or unenforceable
One that gives a beneficiary no right to any part of the trust income or capital but vests in the trustees wide discretionary power to distribute income or capital of the trust as they see fit or to actually accumulate the income
Most popular type of trust administered in offshore jurisdictions as the power and control is vested in the trustee
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Beneficiaries of this type of trust do not usually have a specific claim on any particular asset, or amount of income. The trustees also have power and control over the trust arrangement, for example they can decline to make a distribution of the whole of the trust income or capital if they believe that this is not following the purpose for which the trust was set up. Any income not distributed can be accumulated and will become available for division or distribution at a later date, unless the settlor has directed/requested that it should be applied otherwise – for example, added to capital.
Where there is a conflict of opinion, say for instance regarding a distribution, the English courts have been extremely reluctant to exercise their own discretion in place of the settlor’s chosen trustees.
The main advantage of this type of trust is its flexibility and this makes it an attractive and popular option. The share or portion of each beneficiary can be varied according to their individual needs (for example, to reflect their tax position).
This type of trust has the ability to accumulate its income, as it can be held back and distributed later. A further advantage is the fact that no beneficiary can claim anything of right and a trustee in a beneficiary’s bankruptcy cannot make a claim.
The main disadvantage of this type of trust is that the beneficiary does not know how they stand. They may not even know that they are a beneficiary, with regards to income and/or capital, so they cannot make firm plans. The beneficiaries have no saleable rights and the trustee can change the way they can apply the trust fund at their absolute discretion as and when required. In addition, they may usually add or remove beneficiaries.
The trustee has a wide range of powers afforded to them in a discretionary trust, and it can be daunting for a settlor of a trust to give away their assets and relinquish all control. The settlor may seek to retain an element of control by including within the terms of the trust deed a provision that certain powers may only be exercised with the consent of a protector. The settlor may be the protector although this is not common where the trust is created for tax planning reasons.