Discretionary Trust

In a discretionary trust, no beneficiary has a guaranteed share; instead the trustee has discretion to decide who receives income or capital, and how much, from a defined class of beneficiaries. This flexibility is what makes discretionary testamentary trusts so effective for asset protection and tax planning, because entitlements can be directed to whoever benefits most in a given year. Because no beneficiary "owns" a fixed slice, the assets are also harder for a beneficiary's creditors to reach.

Discretionary trusts are the standard structure for both living family trusts and most testamentary trusts. Example: the trustee of Tom's testamentary trust streams investment income to whichever of his adult children is on the lowest tax rate that year. The trustee's discretion must still be exercised honestly and within the terms of the trust deed or Will.