What are Discretionary Trusts and How are They Taxed?

A discretionary trust is a common type of trust that allows the trustees, not the beneficiaries, to determine how the assets are used. This means that the trustee has complete discretion as to when income is distributed and how to invest the capital held in the trust.

What is a Discretionary Trust?

A discretionary trust is one that gives the trustees the power to distribute income and capital as they see fit, without being required to do so. This can be very useful if you have several beneficiaries who have different needs and wants, or if one beneficiary is contributing most of their income to the trust (the trustee may need to decide whether this is fair).

The trustee’s discretion also means they do not have to distribute income or capital in equal shares if it does not seem appropriate for them to do so. They may also choose not to distribute any capital at all if there are no beneficiaries who need it.

If you believe your estate planning would benefit from a discretionary trust, visit our website for more information on how we can help you create one!

What Parties Are Involved with a Trust

The trustee is the person who manages your money. The beneficiary is the person who receives it. The settlor is whoever started the trust (usually a parent).

In some cases, you may need to be a trustee or beneficiary of a trust yourself in order to make sure that everything goes smoothly and according with plan. This can be incredibly beneficial if you’re close with your parents or other family members, as it gives you control over their finances without having them ever get involved at all (or even know about it).

Who Controls a Trust

The trustee is the individual or institution that controls a trust. The trustee has the responsibility to make decisions about how to spend and distribute funds, as well as to manage assets in accordance with the terms of the trust.

The beneficiaries are those who will receive money from a discretionary trust at some point in time. They may also be called interest holders or income beneficiaries, depending on which type of discretionary trust you have set up.

Some people set up trusts with themselves as both trustees and beneficiaries. A person who owns more than 50% of an asset can manage it without having to worry about getting other people's approval before making important decisions related to spending or investing assets owned by that entity (such as a corporation). When this happens, we say that there is no separation between owner and manager—meaning there’s no separation between beneficiary and trustee either!

What Are the Tax Liabilities of a Discretionary Trust

• You are taxed on your income, not the income of the beneficiaries.
• You are taxed on your income, not on that of the trustees.
• Trusts and estates receive a different tax treatment than individuals do.
• Trustees should be aware of these differences when they are planning their financial affairs so that they can make sure they do not get into any unnecessary trouble with their tax returns or must face any penalties due to inaccurate information submitted.

Discretionary trust is taxed on its net income, not capital gains. If a discretionary trust has any amount of taxable income, then it will be taxed at the progressive rates that apply to individuals and other organisations with similar structures (e.g. charities or companies). If you already have a discretionary trust set up and want to know whether there would be any tax implications for you as trustee or beneficiary if this status were revoked due to changes in law, please contact us directly.

Looking to Create a Discretionary Trust?

We hope we have been able to help you better understand the ins and outs of discretionary trusts. Remember that it's always best to seek professional advice if you have any questions about how these trusts work or whether they are right for you.

Please contact us today for more information on how to set up a discretionary trust.