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Discretionary trust

A discretionary trust leaves it to the trustee to decide whether, when and how much each beneficiary receives. The statutory term "discretionary interest" is narrower and appears in a specific rule about protective trusts.

Meaning of the term

The Cayman Islands Trusts Act defines a "discretionary interest" by reference to a trust specified in another section, and places the term within provisions on court-approved arrangements affecting trusts.[4]

The provision covers a person whose interest under protective trusts is discretionary while the principal beneficiary's interest remains in place. It permits an arrangement affecting the trusts to be considered for that person without the usual detriment condition that applies to other persons represented under the provision.[4]

Jersey's law uses related language for an interest that may arise through a discretionary power after an existing interest ends. This describes a contingent future interest, not a general definition of every discretionary trust.[3]

The Hague Trusts Convention defines a trust through the relationship among a settlor, trustee, assets, and beneficiary or specified purpose. It says the trustee has power and a duty to manage, use, or dispose of the assets under the trust terms and legal duties.[1]

The Convention treats trust administration, trustee-beneficiary relationships, and distribution of trust assets as matters governed by the law applicable to the trust. It does not supply a separate definition of discretionary trust.[1]

The IRS regulation does not define a discretionary trust. Under the IRS regulation, classification turns on the arrangement's purpose and the roles of trustees and beneficiaries, so the label alone does not establish how an arrangement is treated.[2]

Reading the term in context

A discretionary interest can refer to an interest dependent on a trustee's power or on the end of another interest. The relevant conditions differ by statute, including whether the interest is under protective trusts and whether the principal beneficiary's interest has ended.[4]

The surrounding provisions matter because the Cayman definition points to a particular trust provision, while Jersey and Bermuda describe possible interests tied to discretionary powers. These provisions do not provide a single definition of "discretionary trust".[3]

In more detail

A discretionary trust gives trustees discretion over when, how much, and to which beneficiaries trust income and capital are distributed.[6]

Beneficiaries may have no fixed interest or entitlement to trust assets or distributions. Under the Cayman example, a beneficiary may benefit only if the trustee exercises powers in that beneficiary's favor under the deed.[7][8]

The scope of discretion can be qualified by the trust's terms. Distributions may be subject to protector consent and other restrictions under the trust's terms. Trustee decisions must follow those terms.[9][10]

Key points

Beneficiaries of a Cayman discretionary trust have no fixed interest in the fund, and any benefit depends on the trustee exercising powers under the deed.[7]

Related reading

Trust covers the general trust relationship that underlies trustee decisions on distributions. Trust instrument is relevant because the Cayman example ties the exercise of trustee powers to the deed. Trustee covers the role responsible for distribution decisions.

Questions and answers

Is there one definition of discretionary trust?

No. The Cayman law defines "discretionary interest" by reference to a specified protective trust provision. Jersey and Bermuda describe interests that may arise through a discretionary power in stated circumstances.[4]

What is a discretionary interest under the Cayman provision?

It is an interest arising under the trust identified by the Cayman provision. That provision discusses a person with such an interest under protective trusts while the principal beneficiary's interest has not ended.[4]

Does the IRS regulation define a discretionary trust?

The regulation does not define that term. Under the regulation, an ordinary trust is one in which trustees take responsibility to protect and conserve property for beneficiaries, and business or commercial arrangements are classified separately.[2]

What general trust features does the Hague Convention describe?

It describes assets placed under a trustee's control for a beneficiary or specified purpose. The trustee has powers and duties to manage or dispose of assets under the trust terms and applicable legal duties.[1]

  • Trust variation: Trust variation means a change to a trust's terms or powers. Jersey, Cayman Islands and Bermuda laws and the Hague Convention address related terms and rules.
  • Charitable trust: A charitable trust holds property for charitable purposes, and trust laws relate it to purpose trusts and to the other categories of trust used in planning.
  • Trust: The Hague Convention describes a trust as a relationship in which a settlor places assets under a trustee's control for beneficiaries or a specified purpose.
Sources and data notes
  1. HCCH, 1985 Hague Trusts Convention. https://www.hcch.net/en/instruments/conventions/full-text/?cid=59. Retrieved .
  2. Internal Revenue Service, 26 CFR 301.7701-4. https://www.ecfr.gov/current/title-26/section-301.7701-4. Retrieved .
  3. Jersey Legal Information Board, Trusts (Jersey) Law 1984. https://jerseylaw.je/laws/current/l_11_1984. Retrieved .
  4. Cayman Islands Legislature, Trusts Act (2021 Revision). https://legislation.gov.ky/cms/images/LEGISLATION/PRINCIPAL/1967/1967-0006/1967-0006_2021%20Revision.pdf. Retrieved .
  5. Legislature of Bermuda, Trusts (Special Provisions) Act 1989. https://bermuda.fm/legislation/1591. Retrieved .
  6. ogier.com, Trusts in Guernsey | Ogier. https://www.ogier.com/news-and-insights/insights/trusts-in-guernsey/. Retrieved .
  7. collascrill.com, Guide to Cayman Islands Trusts, Cayman Trust Law. https://www.collascrill.com/articles/guide-to-cayman-islands-trusts/. Retrieved .
  8. mourant.com, Guernsey: Trusts, Mourant. https://www.mourant.com/guides/guernsey-trusts/. Retrieved .
  9. maples.com, BVI Trusts and Succession Planning: Options and Structures, Maples Group. https://maples.com/knowledge/bvi-trusts-and-succession-planning-options-and-structures. Retrieved .
  10. occ.gov, Comptroller's Handbook: Personal Fiduciary Activities (Version 1.0, February 2015). https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/personal-fiduciary-activities/pub-ch-personal-fiduciary.pdf. Retrieved .
  11. ogier.com, Overview of BVI Trusts | Ogier. https://www.ogier.com/news-and-insights/insights/overview-of-bvi-trusts/. Retrieved .

Dates in this block record when each source was read for this page.