Disadvantages of a discretionary trust can arise even for high-net-worth individuals and expats who seek flexibility in wealth transfer and asset protection.
While these trusts offer trustees wide discretion over how and when to distribute assets, that same flexibility can create uncertainty for beneficiaries, reduce control for the settlor, and lead to costly administrative and legal burdens.
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In this article, we’ll explore what discretionary trusts are, how they differ from other trust structures, and highlight key disadvantages of a discretionary trust that every wealthy individual should consider before setting one up.
What Is a Discretionary Trust and How Does It Work?
A discretionary trust is a type of trust where the trustee has full authority over how and when to distribute income or assets to the beneficiaries.
Unlike fixed trusts, which specify exact entitlements, discretionary trusts allow flexibility based on the trustee’s judgment.
This structure is often used to provide financial support while maintaining control over how funds are used.
The main difference between a trust and a discretionary trust lies in this level of control.
In a standard or fixed trust, beneficiaries have defined rights to income or capital.
In a discretionary trust, however, no beneficiary has an automatic right to the trust’s assets; instead, the trustee decides how to distribute funds based on the trust deed and any guidance from the settlor.
This flexibility can offer asset protection, estate planning benefits, and tax efficiency—especially useful in cross-border or multi-generational planning—but it also introduces certain disadvantages.
Types of Discretionary Trusts and Common Use Cases
Discretionary trusts come in several forms, each suited for different planning goals.
Some common types include:
- Family discretionary trusts, often used to manage generational wealth while allowing flexibility in how assets are distributed among children or relatives.
- Testamentary discretionary trusts, created through a will and activated upon the settlor’s death.
These are commonly used to protect minor children, preserve wealth from creditors or ex-spouses, and provide tax flexibility for the estate.
- Special needs discretionary trusts, designed to support beneficiaries with disabilities without affecting their eligibility for government aid.
- Charitable discretionary trusts, which allow trustees to support various charitable causes without being locked into a single organization.
For example, a discretionary trust will might be structured to support a surviving spouse and children, giving the trustee the power to allocate funds based on their needs, life stages, or financial circumstances.
This flexibility makes it a useful estate planning tool for HNWIs seeking both control and adaptability.
How Much Does a Discretionary Trust Cost?
The cost of setting up and maintaining a discretionary trust can be significant, especially for those managing complex estates across multiple jurisdictions.
Typical expenses include:
- Setup fees: Legal fees to draft the trust deed can cost at least $1,500, depending on complexity.
- Ongoing administration: Annual trustee fees, tax filings, and compliance reviews often cost between $1,000 and $3,000 per year.
- Specialist advice: International or multi-generational trusts may require tax, legal, and financial advisors, adding to ongoing costs.
These expenses can erode trust assets over time, making it important to weigh the financial benefits against the cost of professional management.
What Are the Pros and Cons of a Discretionary Trust?
A key advantage of a discretionary trust is its flexibility.
Trustees have the authority to decide how and when to distribute assets, allowing them to adapt to beneficiaries’ changing circumstances or protect wealth from unforeseen risks.
However, this same flexibility can lead to challenges.
The lack of guaranteed distributions may cause uncertainty for beneficiaries.
Additionally, discretionary trusts involve administrative complexity, potential tax inefficiencies in certain jurisdictions, and reduced control for the settlor once the trust is established.
Main Disadvantages of a Discretionary Trust
Loss of direct control by the settlor: Once assets are transferred, the settlor cannot dictate distributions and must rely on trustees.
Uncertainty for beneficiaries: Beneficiaries have no automatic right to trust assets, leading to uncertainty about if or when they will receive distributions.
Trustee power and potential disputes: Trustees hold significant discretion, which can result in conflicts or legal challenges from dissatisfied beneficiaries.
Administrative and compliance complexity: Managing the trust involves legal filings, tax reporting, and adherence to regulatory requirements.
High discretionary cost over time: Ongoing trustee fees, legal costs, and professional advice can accumulate, making it expensive to maintain long term.
What Are the Disadvantages of a Trustee in a Discretionary Trust?
Significant responsibilities and legal burdens: Trustees must act in the best interest of beneficiaries, manage investments prudently, and comply with complex fiduciary duties, exposing them to legal liability if they fall short.
Risk of conflict with beneficiaries: Since trustees have broad discretion, their decisions may be challenged by beneficiaries who disagree with how distributions are handled or believe they are being unfairly excluded.
Accountability and decision-making challenges: Trustees must balance competing interests among beneficiaries while maintaining neutrality, which can lead to stress, delays, or costly disputes if expectations are not managed carefully.
Can You Change the Beneficiaries of a Discretionary Trust?
Flexibility limits: In most cases, the settlor cannot directly change the beneficiaries once the trust is established.
The power to decide who benefits typically rests with the trustee, guided by the terms of the trust deed.
Legal options and restrictions: Modifying beneficiaries may require a formal trust amendment, court approval, or rely on powers of appointment granted in the trust document.
Some jurisdictions allow limited adjustments, but discretionary trusts are generally designed for trustee-led flexibility rather than settlor control.
Discretionary Trust Problems in Practice
Real-world complications: Discretionary trusts can face challenges like trustee disputes, delays in distributions, and conflicts among beneficiaries over perceived fairness.
Mismanagement or lack of clear guidance can lead to litigation or strained family relationships.
When they may not be the right solution: A discretionary trust may not suit individuals who want certainty in how assets are distributed or who prefer retaining control.
They can also be less ideal when beneficiaries rely on predictable income or when administrative costs outweigh the benefits.
Conclusion
A discretionary trust offers valuable flexibility and asset protection, but it also comes with notable drawbacks.
The disadvantages of a discretionary trust—including high costs, administrative complexity, and reduced control—may outweigh the benefits depending on your financial goals.
Given the legal and tax implications, it’s essential to seek professional legal or financial advice before setting up or relying on a discretionary trust in your estate plan.
An experienced advisor can help determine if this structure aligns with your wealth preservation and succession objectives.
Pained by financial indecision?
Adam is an internationally recognised author on financial matters with over 830million answer views on Quora, a widely sold book on Amazon, and a contributor on Forbes.
