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DISCRETIONARY AND NON – DISCRETIONARY TRUSTS [249]

 Trusts may be discretionary or non – discretionary. In a discretionary trust, the trustee is given the power of choice, such as the power of choice, such as the power to determine the date of the distribution of trust property; whether income is to be paid to a beneficiary; how much is to be paid to a beneficiary; and in what proportions, among a group of beneficiaries, it is to be paid. For example, by using their discretionary. Powers, trustees may, in certain circumstances, allocate income to taxpayers with a lower marginal tax rate. The trustee may also be given the discretion to decide when a trust is to be terminated. The flexibility provided by the discretionary trust has made it a useful tool in tax planning. With a non – discretionary trust, the trustee does not have the power of choice. The trust document sets out these decisions.

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Unlike, the beneficiary of a fixed trust, the law is that the beneficiaries of a discretionary trust are not entitled to any specific part of the trust assets until the trustees act in good faith, the establishes principle is that the courts will be reluctant to second guess their use of the discretion the settlor has given them, if the trustees of a discretionary trust bypass one of the beneficiaries in the distribution of the trust property, there is nothing to prevent that beneficiary from bringing proceedings against the trustees alleging they abused their discretion or that they ignored relevant factors or gave significant weight to irrelevant considerations.

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To decrease the risk of conflict, consideration might be given to the following:

The preparation of a suitably worded letter of wishes by the settlor which supports the contemplated distribution; or

Minutes or memoranda from the trustees, evidencing the fact that they had turned their minds to relevant considerations relating to the contemplated distribution.

Planning Points

 

  • Discretionary trusts are often used in providing for a disabled beneficiary. The discretion of the trustee to distribute income or principal as he or she sees fit means the beneficiary does not have a vested interest; this can serve to preserve means – tested government disability benefits.

Likewise, because the beneficiary does not have a vested interest, discretionary trusts may be useful vehicles in creditor protection planning.

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