A discretionary trust is a flexible type of trust where the trustees can use their discretion to benefit the beneficiaries named in the trust deed, out of the capital and income. They are more common than fixed trusts, and are typically used in the family and wills context where the ‘settlor’ creates a trust to benefit a class of family member, such as grandchildren.
It is a useful and effective way to manage and protect family wealth both during and after the settlor’s death.
What rights do the beneficiaries have?
The beneficiaries under a discretionary trust have no ‘proprietary interest’ in the trust fund unless the trustees decide on a distribution. This means they do not own the beneficial interest under the trust – merely a hope that they will benefit. They may never do so. The trustees are the legal owners of the trust property.
Conversely, in the case of a fixed trust, the beneficiaries do have a proprietary interest in the property held on trust for them, and may compel the trustees to transfer the legal title to them under the rule in Saunders v Vautier (1841) Cr & Ph 240. That said, the position of the beneficiaries of a discretionary trust is not so clear cut and has led some commentators to suggest that they have a ‘quasi-proprietary’ right. In some cases, if all the beneficiaries can be determined, they may be able to terminate the trust.
Whilst the beneficiaries have no right to receive a distribution under a discretionary trust there is potential recourse if no distribution is made for a number of years. In a 1977 case, the court held that whilst it could not compel the trustees to exercise their powers in a specific manner, it could order replacement of the trustees.
Rights to disclosure
The beneficiaries have a limited right to disclosure. Trust beneficiaries have a fundamental right to ensure the trust is administered properly. This means in accordance with both the law and the terms of the trust deed. However, this does not mean they have an automatic right to the information they request.
Generally, the beneficiaries are entitled to see the Trust documents, which include the Trust Deed, trust tax returns and balance sheets, and copies of minutes of trustee meetings where the trustees decide to make distributions, and to whom.
Disclosure is subject to any term in the Trust Deed that prevents a document or certain information being disclosed. If a beneficiary seeks disclosure of information and the trustees do not comply, an application could be made to court to order disclosure. Expert legal advice will be needed.
How do the trustees decide who to benefit?
It is up to the trustees to decide which, if any, beneficiary named in the trust deed to benefit from the income or capital, and for what purpose. The trust deed may limit their powers, for instance, they may be able to decide when to allow the beneficiaries to benefit but may not be able to change their shares.
The trustees must act appropriately towards the beneficiaries, for instance, they must keep good accounting records and record their decisions. They must also ensure all due taxes are paid.
The key thing for beneficiaries under a discretionary trust to note is that they do not have an automatic right to a distribution at any point.