Discretionary trusts empower trustees with broad control over asset allocation and distribution to beneficiaries. Trustees decide who benefits, when, and to what extent, without beneficiaries having an automatic entitlement to distributions. This flexibility allows for varied needs and circumstances of beneficiaries, and can be used for asset protection and tax planning.  Trustees are legally responsible for the trust’s assets and have a duty to act in the best interests of beneficiaries. 

How do they work?

• The settlor gives property to the trustee to hold and maintain. The trustee has the discretion to decide how much and when to distribute the trust's assets and income to the beneficiaries. 
• The trustee must administer the trust in accordance with the trust deed. 
• The trust deed determines the beneficiary entitlements. A Memorandum or Letter of Wishes can tell the trustee how to distribute assets and income, and for what purpose. 

Benefits

• Discretionary trusts provide flexibility and can protect assets if circumstances change because nobody knows what is going to happen after they die.  Giving trustees some discretion in meeting the purposes of the trust is therefore very beneficial.

This is where your vision, planning, and Letter of Wishes becomes very important in providing guidance to the trustees on meeting the needs of your beneficiaries.

• Beneficiaries of a discretionary trust don't have a legal interest in the trust's income or capital until the trustee decides to distribute it to them. 
• Beneficiaries are only entitled to the share of income or capital that has been distributed to them or allocated to them (sometimes income is allocated but not distributed). In  the latter case it is an asset of the person but they do not receive any money.  It is important to note that if the person is on a WINZ benefit, that asset would still need be disclosed to WINZ.

Family trusts 

• Most family trusts in Aotearoa New Zealand are discretionary trusts.
• Family trusts are designed specifically for family members.

Changing a discretionary trust 

• Changing a discretionary trust may create a new trust, which can have tax and administrative considerations.

Disadvantage of discretionary trusts

A discretionary trust can have the potential disadvantage of creating uncertainty for beneficiaries because trustees have discretion over who receives benefits and how much, so not all beneficiaries are guaranteed to benefit.