Discretionary Trust

A flexible form of trust in which the beneficiary has no fixed interest in any part of the income of the trust or its assets except perhaps at the termination of the trust. The discretions are vested in the trustee who can usually decide which of the beneficiaries is to benefit, when and to what extent. However, the Trustees may be guided by an informal memorandum written by the settlor or protector, which outlines their wishes but has no legal or binding effect.

The essence of a discretionary trust is that a beneficiary has no right to claim any part of the income or even principal. One advantage of this arrangement is that benefits can be varied according to changes in circumstances with little difficulty. Another is that the beneficiary has a somewhat vague hope of receiving anything and therefore it is difficult for any creditors to find an interest to which to attach a liability.

Discretionary trusts (usually established offshore) are particularly useful in protective trusts. It should be noted that under the English Trustees Act of 1925, Section 33, a protective trust can be created expressly by creating a determinable life estate followed by a discretionary trust.