Trustees of a discretionary trust generally have ‘discretion’ about how to use the income and capital of the trust. They may for example be required to use any income for the benefit of particular beneficiaries, but they can decide:
how much is paid
to which beneficiary or class of beneficiaries payments are made
how often the payments are made
what, if any, conditions to impose on the receipts.
Trustees may, or may not, be allowed to ‘accumulate’ income within thefor as long as the law allows rather than pass it to the beneficiaries. Income that has been accumulated becomes part of the capital of the trust.
Thesecan have advantages, but they may involve an immediate charge to Inheritance Tax (IHT) and regular charges thereafter. Their suitability in a particular case depends on the balance of flexibility and taxation factors.
An Example Of A Discretionary Trust
Nicky puts money into a discretionary trust to be held for 12 years, for the benefit of his two grandchildren, Jack and Emily. The trustees can decide how to invest or use the money and any interest it earns to benefit the grandchildren, and so, when the children are young, the trustees might decide to pay for music lessons for them, and as they get older the trustees might pay towards a wedding.