Discretionary trust

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One of those legal concepts all bankers should know. A discretionary trust is one where a trustee holds legal title to assets for the benefit of a class of beneficiaries, but the trustee retains power to decide when, whether and how to apply the assets of the trust.

Assets held by the trustee of a discretionary trust don’t fall into the trustee’s insolvency estate and nor do they fall into any beneficiary’s insolvency estate. The trustee retains flexibility — well, discretion — to decide what to do with those assets. Since the beneficiaries of a discretionary trust must be identifiable but otherwise may be indeterminate class of people — Stratocaster owners of the world, for example — and the trustee retains power to choose when, whether and on whom to confer any benefits of the trust, none of the beneficiaries need to (or indeed, can) record any direct beneficial interest in the trust assets, at least until the trustee has actually exercises its discretion in their favour.

See also

• Legal concepts all bankers should know
• McPhail v Doulton [1970] UKHL 1