Discretionary trust is one where the specific shares of the beneficiaries are not known. That is, the trustee has the discretion to decide, from time to time, who (if anyone) among the beneficiaries is to benefit from the trust, and to what extent. For better understanding - in a determinate trust, the entitlement of the beneficiaries is fixed by the settlor, the trustees have no discretion in determining the amount of distributions to be made to the beneficiaries.
In a Discretionary Trust, no beneficiaries have defined beneficial interests, which may be attractive for tax and asset protection reasons as well as ensuring great flexibility as the circumstances of the discretionary beneficiaries change in the future. In the event that trustees have clearly retained the income of the trust and brought it forward year to year without disbursing it to the beneficiaries, the trust is discretionary.
The way that the Trustee's discretion is exercised can be periodically influenced by the Settlor or nominee through a Letter of Wishes. A mechanism to protect the Settlor's interests is to have the Trust Deed appoint a Protector, usually a nominee of the Settlor, with the power to serve notice to dismiss the Trustee and appoint a new Trustee.
The Settlor and the Beneficiaries thereby retain indirect power to replace the Trustee if they are not satisfied by the exercise of the Trustee's discretion.
This kind of trust is the best solution in case when the settlor wants a professional trustee to continue to hold and manage the assets on behalf of future generations, and only provide the beneficiaries with such financial benefit as the settlor originally intended. Such trusts are the most flexible, and likewise the most complex, but can provide distinct advantages for both tax and succession planning, especially where the beneficiaries are minor, spendthrift or have special needs.