DISCRETIONARY TRUSTS
CONTENTS
1.0 Introduction
2.0 Objectives
- Main Content
- Description and Features of Discretionary Trusts
- Uses of Discretionary Trusts
4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment (TMA)
7.0 References/Further Readings
INTRODUCTION
Discretionary trusts are essential in estate planning and for a variety of other purposes. In commonwealth jurisdictions and the United States of America, the use of this type of trust is common place, although the nomenclature for it in the
U.S.A. differs. Despite the common use of Discretionary trusts in other jurisdiction, its use is not common in Nigeria. The extended family systems in Nigeria coupled with cultural and social difference in the lives of the people are responsible for the uncommon use of discretionary use in Nigeria. As it is with charitable trusts, the economic situation in Nigeria has to some extent affected the use of discretionary trusts in Nigeria. A consideration of thus type of trusts is necessary to familiarize you with it and its workings.
OBJECTIVES
In this Unit, you will be taken through the description and features of what may be regarded as discretionary trusts, and the objectives of the type of trusts. You learn about the distinctive features of discretionary trusts and the limitation of court’s powers in the exercise of the discretionary powers given to the trustees in this type of trusts. You will also be exposed to the brief classification of discretionary trusts. At the end of this Unit, you should be able to:
- Know the essential features of discretionary trusts
- Understand the limited rights of the beneficiaries and the wide discretion conferred on the trustees
- Explain why courts cannot influence the trustees in exercise of their discretion
- Understand the types of discretionary trusts and the practical situations that discretionary trusts can be used
- Explain the advantages and disadvantages of discretionary trusts
MAIN CONTENT
Description and Features of Discretionary Trusts
A discretionary trust may arise by the express act of a settlor giving a property or fund to trustees for the purpose of benefiting one or more persons. The trust instrument usually states how to administer it but the actual details of how to do so is left to the discretion of the trustees. Instead of the trustees giving specific income periodically to the beneficiaries, the trustees are given the right to accumulate income from the trust property with a complete discretion to distribute the same in the future. Even in a case where the trustees do not have the right to accumulate income, they are entitled to determine the amount of income to be paid to the different beneficiaries. See Re Gourju’s W.T. [1943] Ch. 24.
In a discretionary trust, the trustees have discretion with respect to the trust fund. They have power to determine which beneficiary or beneficiaries from within a class will be receive income from the trust and can also determine what amount of payment that goes to the beneficiaries. They can even decide not to make any payment.
The right of the beneficiary to a specific interest in the trust property is uncertain, unlike with the case with a fixed trust, where the right of the beneficiary is assured or certain. In a discretionary trust, the beneficiary can only live on the hope that the trustees will exercise their discretion is his favour to entitle him to some income or part of the trust property. Owing to the complete vesting of the trust property in the trustees, the beneficiary cannot lay claim to any part of the trust property as his and thus, cannot transfer any interest in the same.
As a result of the complete discretion of the trustees in a discretionary trust, to determine whether to give or deny the beneficiaries some entitlements from the trust property, the beneficiaries cannot compel the trustees to use the same for their benefit and neither can the court compel the trustees to exercise their discretion one way or the other. However, where the trustees refused or neglect to exercise their discretion at all, the court can give order that they be replaced. See Re Locker’s Settlement [1977] 1 W.L.R. 1323.
The beneficiaries can however put an end to the trust where they are all of full capacity and are all absolutely entitled to the income or both income and capital, in which case, they can request the trustees to hand over the income or trust property to them or their nominees. See Re Smith, Public Trustee v. Aspinall [1928] Ch. 915.
In a discretionary trust, it is required that the trust comply with the requirement of certainty of object, as it is with a private trust, although it is not required that the trustees should be able to make a complete list of the objects, as it is sufficient if the trustees can determine those within the class of the intended beneficiaries. See McPhail v. Doulton [1974] A.C. 424. However, where the trustees are able to come up with a complete list of all the beneficiaries, the beneficiaries in that case can put an end to the trust.
Where the beneficiary of a discretionary trust sells his interest or becomes bankrupt his assignee or trustees in bankruptcy have no more right than to the beneficiary to demand payment from the trustees. If the trustees exercise their discretion in favour of the beneficiary by paying the money to him or delivers goods to him, his assignee or trustee in bankruptcy is entitled to the money or the goods. See Re Coleman (1888) 99 Ch.D. 443.
It is important for you to note that discretionary trust can only come into existence by the act of the settlor, in other words as a class of express trusts. A discretionary trust can therefore not come in existence imposed by law through constructive trust, by implied or resulting trusts.
You have to note that, as a result of the often complete discretion the trustees have in a trust of this nature, it is usually important to ensure that there are people of high integrity to act as trustees in order to achieve the object of the trust, before deciding to create a trust of this nature, otherwise the object will suffer in the long run.
SELF ASSESSMENT EXERCISE (SAE) 1
What is the discretion exercisable by the trustees in respect of application of the income or the trust property for the benefit of the beneficiaries?
Uses of Discretionary Trusts
Discretionary trusts have been found to be of great use for the following purposes:
- As a means of estate planning and to limit tax payments
- To provide for family members or close persons
- To protect vulnerable beneficiaries
- To protect the trust properties, from creditors or other liabilities
- It is flexible in the hands of the trustees, who can use their discretion appropriately in favour of the trust property
One of the disadvantages of discretionary trust is the uncertainty of the interest of the beneficiaries in the trust property unlike the situation in a fixed trust or if the beneficiary is a life tenant.
SELF ASSESSMENT EXERCISE (SAE) 2
Discuss the advantages of discretionary trusts and the disadvantages, if any that you have noticed.
CONCLUSION
Discretionary trusts are vital part of trusts which have their unique features and can be used for various purposes. Finding people of high integrity to act as trustees in a trust of this nature is very crucial to its creation and achieving the purpose of the trust. This trust can be used especially to provide educational benefit among others to family members and other close associates.
SUMMARY
In this Unit, you have learnt about the description and features of discretionary trusts. You also learnt about the complete discretion given to the trustees in the management of the trust property to decide whether to pay or not pay any income or apply the trust property to the advantage of the beneficiaries. When the trustees decides to pay income to the beneficiaries, they also have discretion to decide how much to be paid. You have to note that the beneficiaries have no right to the trust property or any income from the same except as may be decided by the trustees and the trust instrument. You are further exposed to instances when a discretionary trust can be terminated, the uses of discretionary trusts and its advantages were examined. With the consideration of the above, you should be able to apply this trust for practical use in the Nigerian society. In the next Unit, you will learn about protective trusts.
TUTOR-MARKED ASSIGNMENT (TMA)
- The right of the beneficiaries in a discretionary trust is uncertain. Discuss and indicate when the beneficiaries can put an end to the trust
- Discretionary trusts cannot be imposed by law or arise by resulting trust but by the express act of the settlor. Discuss
REFERENCES/FURTHER READINGS
Caverly, N.B. and Simon, J.S. Estate Planning with Protective Trusts to Cover Your Assets, Retrieved September 26, 2010 from http://www.dummies.com/how-to/content/estate-planning-with-protective-trusts- to-cover-yo.html
Hayton, D.J. (2001). Hayton & Marshall Commentary and Cases on The Law of Trusts and Equitable Remedies. London: Sweet & Maxwell.
The Free Dictionary, Discretionary Trust, Retrieved September 26, 2010 from http://legal-dictionary.thefreedictionary.com/Discretionary+Trust
Wisegeek, What is a Discretionary Trust?, Retrieved September 26, 2010 from http://www.wisegeek.com/what-is-a-discretionary-trust.htm