Trustee Discretion: Where Absolute Does Not Mean Unfettered

• Published date: 23 January 2024
• Subject Matter: Corporate/Commercial Law, Tax, Family and Matrimonial, Corporate and Company Law, Income Tax, Capital Gains Tax, Trusts, Wills/ Intestacy/ Estate Planning
• Law Firm: O'Sullivan Estate Lawyers LLP
• Author: Ms Blair L. Botsford

Trusts, and discretionary trusts in particular, are a staple of estate planning for their flexibility and adaptability. They can address a multitude of situations such as: managing assets for spouses, minors, persons with disabilities or vulnerabilities; asset protection and preservation; business wealth and succession; and incentivizing activities such as education. Trusts are not just for personal planning as they can form the basis for active charities and foundations or be used for business purposes such as mutual funds or an alternate to a corporation.

Whatever the flavour of trust, a key to their effective functioning is the trustee powers, which can be subject to varying degrees of discretion. Trustee powers can cover issues such as the following, which may not all be included in a particular trust deed:

• Income and capital distributions
• Determining the distribution date
• Selling and mortgaging real property
• Ability to make loans or borrow
• Investing trust property
• Acquiring and selling trust property
• Retaining advisors, agents and experts
• Settling new trusts or transferring assets to other trusts
• Removing and replacing trustees
• Adding and removing beneficiaries
• Amending the trust deed
• Making tax elections
• Settling claims

What is the difference between a Fixed and a Discretionary Trust?

The term "fixed" versus "discretionary" refers to the power of trustees to distribute income and capital.

An example of a fixed interest trust is one where a beneficiary is entitled to receive all of the income during their lifetime, and no one else has a right to the capital, such as alter ego, joint partner or spousal trusts. Here, the trustee does not have discretion whether or not to pay income to the specified beneficiary; however, the trustee may still have discretion as to the timing of the payments during the year and the amounts, provided all of the income for a particular fiscal year of the trust is paid or payable to the income beneficiary.

A special example of a discretionary trust is the Henson trust, which states in its provisions that the income and capital does not vest in the primary beneficiary. Instead, the only interest the beneficiary has is to payments of interest or capital actually made to or for their benefit. As a result, it is the remainder beneficiaries who are the true beneficiaries and the primary or life beneficiary is the object of a power of appointment instead, which may be fiduciary in nature.

Henson trusts are used for disability...