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Discretionary Trusts

The second main category of trusts are discretionary trusts, which define in the trust deed a class of beneficiaries who can benefit in the future but whose exact interest is not currently specified. Most modern trust deeds also have the power to add new beneficiaries into the deed in the future should this be desirable. Where a discretionary trust is set up, it is important that the trustee understands the settlor’s situation and can advise him on the best course of action that he should follow from time to time.

When making a discretionary settlement, most professional trust companies ask the settlor to write a Letter of Wishes which sets out what he would like to happen to the trust fund in the future. This Letter is not legally binding, but in practice the trustee always follows it. The Letter can be changed during the settlor’s lifetime but after his death it would be regarded as his final wishes. However, it is worth mentioning that the settlor can designate someone else to give a Letter of Wishes in the future if necessary.

It is also possible to name in the trust deed a person called a protector. The protector is an individual known personally to the settlor and indeed the settlor can himself be the first protector. Where a protector is utilized, the trustees have to obtain his approval before any distributions of funds from the trust can be made. Often times the protector has the power to remove trustees if he believes the trustees have not acted properly.