What is the meaning of a discretionary trust?
A discretionary trust allows a person to hold onto their assets without being the legal owner of the property. This can have significant advantages. For example, if a creditor pursued a beneficiary’s assets, the trust property is generally protected because the trustee is the legal owner rather than the beneficiary.
What is the purpose of a discretionary trust?
A discretionary trust gives trustees the power to decide how much beneficiaries get from a trust and when they get it. All capital and income is distributed completely at their discretion. This means there’s more flexibility and assets can be protected if circumstances change for any reason.
What is the difference between a trust and a discretionary trust?
Normal express trusts are “fixed” trusts; the property is held for a fixed number of beneficiaries, and the trustee is obliged to distribute property without any discretion over who gets what. In a discretionary trust, however, the trustee has discretion over his actions, although he is obliged to use it.
What are the advantages of a discretionary trust?
Advantages of a Discretionary Trust Trust property is exempt from creditors. A creditor cannot take trust property in bankruptcy or liquidation (unless the debt was originally a trust debt) Tax minimisation, as individuals can receive a 50% Capital Gains Tax exemption under a trust.
Can you take money out of a discretionary trust?
‘ For example, many discretionary trusts will opt to invest in investment bonds (either UK or offshore based) as they do not produce an income and up to 5 per cent of the initial amount invested can be withdrawn without triggering an immediate tax liability (this can’t be done indefinitely).
Who owns the assets in a discretionary trust?
the trustee
While discretionary trust assets are legally owned by the trustee, the trustee does not beneficially own the assets. The trustee must, however, manage and safeguard the assets for the general body of potential beneficiaries, but no beneficiary can demand an asset or income from the trustee.
What are the disadvantages of a discretionary trust?
Disadvantages of Discretionary Trusts
- Family Trust Distribution Tax.
- Losses cannot be distributed.
- Beneficiaries Lack Legal Interest in Trust Property.
What are the three types of trust?
To help you get started on understanding the options available, here’s an overview the three primary classes of trusts.
- Revocable Trusts.
- Irrevocable Trusts.
- Testamentary Trusts.
What is the 7 year rule for trusts?
Beneficiaries may also be responsible for paying inheritance tax if the trust settlor dies within seven years of establishing the trust because bare trusts are treated by tax authorities as potentially exempt transfers. No inheritance tax will be owed, however, if the settlor outlives those seven years.
Do you pay income tax on a discretionary trust?
Discretionary or accumulation trusts and Income Tax Trustees are responsible for declaring and paying Income Tax on income received by the trust. They do this on a Trust and Estate Tax Return each year.
Who is the beneficial owner of a discretionary trust?
the Trustee is the sole Beneficial Owner of the Trust Assets.
What is the most common type of trust?
revocable trusts
Between the two main types of trusts, revocable trusts are the most common. This is primarily due to the level of flexibility they provide. In a revocable trust, the trustor (or the person who created the trust) has the option to modify or cancel the trust at any time during their lifetime.
What does a discretionary trust mean?
A discretionary trust is a trust where the trustee has the discretion as to how to distribute the income and capital of the trust. The exercise of the trustee’s discretion is governed by the terms of the trust deed of the trust.
What are fixed and discretionary trusts?
A fixed trust gets the amount and terms of each beneficiary’s share while a discretionary trust lets the trustee make decisions about who becomes a beneficiary.3 min read. Fixed trust vs discretionary trust: A fixed trust, also known as a discretionary trust, determines the amount and terms of each beneficiary’s share at the beginning.
How does a discretionary trust work?
Discretionary Trust. A trust in which a trustee is able to make decisions without the need to consult others. For example, a discretionary trust gives the trustee the right to make significant investment decisions without permission from or even consultation with the trustor or the beneficiary.
What are the benefits of a discretionary testamentary trust?
The benefits of testamentary discretionary trusts include: Asset protection. A testamentary trust can provide significant asset protection, which will be important if your surviving spouse or an adult child is engaged in an occupation that carries significant risk of litigation or owns a business.