Duhaime's Law Dictionary


Discretionary Trust Definition:

A trust in which the settlor has given the trustee full discretion to decide which (and when) members of a defined group of beneficiaries is to receive either the income or the capital of the trust.

Related Terms: Trust, Sprinkling Trust, Fixed Trust, Spendthrift Trust

Underhill 's Law of Trusts, 17th edition:

"A discretionary trust is a trust in which a beneficiary has no such absolute current right to direct the trustee to pay him an ascertainable part of the net income....

"A trust is a discretionary trust ... where property is given to trustees to distribute the income therefrom among such of A's children, grandchildren, nephews, nieces, great nephews and great-nieces as the trustees see fit."

A discretionary trust is unique in that the trustee has discretion on all particulars as regards to the payment of income or capital to the beneficiaries. The distinction is important in law as it can affect the extent to which a beneficiary of such a trust may be able to make demands upon the trustee.

In Re Smith, the English court wrote:

"Where there is a trust under which trustees have a discussion as to applying the whole or part of a fund to or for the benefit of a particular person, that particular person cannot come to the trustees, and demand the fund; for the whole fund has not been given to him but only so much of the trustees think fit to let him have.

"But when the trustees have no discretion as to the amount of the fund to be applied, the fact that the trustees have a discretion as to the method in which the whole of the fund shall be applied for the benefit of the particular person does not prevent that particular person from coming in saying: 'Hand over the fund to me.'"

Scott on Trusts (USA) , at §128.3 and §155, defines a discretionary trust as follows:

"... where by the terms of the trust is provided that the trustee shall pay to or apply for a beneficiary only so much of the income and principal or either as the trustee in his discretion shall see fit to pay or apply...

"It is usually provided that the income shall be applied for the benefit of the beneficiary and his or her spouse and children or more remote issue, if any, and, if none, his next of kin, for the benefit of all or any one of more of these exclusive of the others. In such a case the beneficiary is not entitled to demand any part of the income or principal, and his creditors therefore cannot demand any part....

"The beneficiary cannot obtain the assistance of the court to control the exercise of the trustee's discretion except to prevent an abuse by the trustee of his discretionary power. What constitutes a such abuse depends on the extent of the discretion conferred on the trustee. If the settlor manifested an intention that the discretion of the trustee should be uncontrolled, the court will not interfere unless he acts dishonestly or from an improper motive, or fails to use his judgment."

The leading authority of trust law in Canada, Donovan Waters, writes:

"Discretionary trust, or sprinkling trust as they are known in the United States, occur when the trustees are vested with property and are required to allocate it as they think fit among a class of beneficiaries....

"The discretionary trust normally requires the trustees to dispose of the trust property to whom among the class they think fit, in the amount and when they think fit. Sometimes they also have a discretion as to the form in which disposition is to be made, and even though discretionary trusts normally involve funds so that they will issue cheques, this will allow them to transfer shares or stock, for instance....

"The property which is to be distributed will be decided upon by the settlor or testator. It may be the income of the capital, or income and capital."

Although it may sound unusual (strange things can happen when lawyers try to avoid taxes!), a so-called discretionary trust in which the trustee is also the beneficiary may well not be taken by the Court as a discretionary trust.

REFERENCES:

  • Hayton, David, Underhill and Hayton Law Relating to Trusts and Trustees, 17th Ed. (London: LexisNexis-Butterworths, 2006), page 85
  • In re Smith, 1928 Ch. 915
  • Scott, A. W., The Law of Trusts, 4th Ed. (Boston: Little, Brown and Company), 1987), §128.3 and §155.
  • Waters, D., Gillen, Mark and Smith, L., Waters' Law of Trusts in Canada, 3rd Ed. (Toronto: Thonson-Carswell, 2006), pages 1145-1148.

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