What are the Benefits
of a Discretionary Trust?
A discretionary trust can offer significant advantages over a fixed trust for estate planning, wealth preservation and tax planning purposes.
In estate planning, a discretionary trust can help a settlor in the distribution of assets. For example, the settlor can request the trustee to make a decision based on circumstances at some future point in time as to whether or not an individual should receive a distribution from the trust fund. These circumstances may depend upon the individual’s financial position and needs at that time as well as the individual’s marital status or status within the wider family at that time. The discretionary trust thus provides flexibility in cases where it is impossible at the time the trust is setup to predict what would be the most appropriate division of assets.
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Equally, in wealth preservation, a discretionary trust can help to shield assets from creditors. By its nature, once the settlor transfers his wealth and assets into the trust, those assets no longer belong to settlor. As a general principle, a creditor can only seize the assets of the debtor and has no right to look at the assets of any other person. Thus, creditors can no longer seize those assets to satisfy debts owed by the settlor. At the same time, because the trust is discretionary in nature, the trustee can make distributions from the trust fund to the settlor.
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Can a Settlor Control Assets within a Discretionary Trust?
Given the wide latitude a trustee may have in a typical discretionary trust, the settlor will often try to check the trustee's discretion through various means. These include:
Restrictions on the trustee in the trust deed
Letters of wishes
Protectors, appointors and enforcers
The settlor may prescribe in the trust deed how the trustee should act. Typically, a trust deed will describe the group of individuals who will be beneficiaries of the trust (e.g. “all my children”). These prescriptions restrict the scope of the trustee's discretion to decide who will benefit from the trust.
What is a Letter of Wishes?
A letter of wishes provides guidance to the trustee as to how the settlor wishes the trustee to exercise its discretion under the trust. Though a letter of wishes has no binding effect on the trustee, a trustee will normally have regard to the wishes so expressed within the framework of the trust deed and the trustee's duties under the law.
What is a Protector of a Trust?
A protector of a trust is a person to whom certain powers to supervise the trustee are reserved under the trust deed. These powers may include, for example, the right to remove the trustee and appoint a new one. A protector is sometimes known as an “appointor” or “enforcer”.
