A discretionary trust gives the trustees discretion, within the powers granted by the trust deed, to decide whether and when benefits will be distributed and to which beneficiaries. This flexibility is useful, but it also means that a discretionary beneficiary generally has no fixed right to demand a distribution until the trustees validly exercise their discretion or a right otherwise vests.
The trustees’ discretion is fiduciary, not arbitrary. They must act jointly where required, exercise independent judgment, consider the purpose and terms of the trust, manage conflicts of interest and properly record material decisions. Poor governance can create family disputes and can expose trustee decisions to challenge.
Financing may also be more complex where property is held as trust property. Banks can lend to trusts, but their lending criteria, security requirements and requests for trustee or beneficiary guarantees differ from lender to lender. The tax treatment of discretionary distributions is also technical. Sections 7, 7C and 25B of the Income Tax Act and the Eighth Schedule can affect who is ultimately taxed, and the rules differ for resident and non-resident beneficiaries. Trustee discretion does not, by itself, make distributions tax-efficient.
See also: What type of trust is best for a family? | Can a trustee be a beneficiary of a trust? | What are the disadvantages of a trust in South Africa?
Disclaimer: The information provided here is intended as general guidance only and does not constitute legal, tax, or financial advice. Every situation is unique, and legislation is subject to change. We invite you to reach out to our team at Wealth and Legacy Group for guidance tailored to your specific circumstances.