How discretion works
A discretionary trust gives the trustees a power, and sometimes a duty, to choose which of a class of beneficiaries should benefit, when and by how much. The class might be the settlor's children and grandchildren, their spouses, and certain charities. Until the trustees exercise their discretion, none of those people owns any part of the fund.
That flexibility is the point of the structure. It lets trustees respond to changing needs across generations: helping one grandchild with university costs, another with a first home, and holding back from a beneficiary going through a divorce or a difficult period. It also means each distribution is a deliberate act of judgement that has to be properly made and properly recorded.
How trustees decide
Trustees exercising a discretion must act within the terms of the power, for the purpose it was given, and after considering relevant matters. In practical terms, a careful trustee will work through a short sequence before agreeing to a distribution:
- Confirm that the proposed recipient is within the class of beneficiaries, reading the deed and any deeds adding or excluding beneficiaries.
- Check which power is being used: income, capital, or a power of advancement or appointment, each of which may have different conditions.
- Consider the request itself, the beneficiary's circumstances, and the interests of the other beneficiaries.
- Read the letter of wishes, if there is one, and take it into account without treating it as binding.
- Identify any consent required from a protector or other party.
- Obtain tax advice where the distribution may have consequences for the beneficiary or the trust.
Trustees do not have to give every beneficiary something, or treat beneficiaries equally. They do have to give real thought to the decision. A trustee who simply follows instructions from the settlor or a dominant family member, without independent consideration, risks having the decision challenged.
Documenting the decision
The record of a distribution decision should be written at the time, signed by the trustees, and kept on the trust file. A good resolution states:
- The name of the trust and the trustees acting.
- The power under which the distribution is made, with a clause reference.
- The beneficiary, the amount and the currency.
- Whether the distribution is of income or capital.
- The reasons in brief, and the matters considered.
- Any consent obtained, with a copy attached.
- How and when the payment is to be made, and to which account.
The reasons need not be lengthy. One or two sentences showing that the trustees thought about the beneficiary's needs and the effect on the fund is usually better than a page of boilerplate. Where a decision is controversial, or a large part of the fund is involved, fuller reasons and a note of advice received are sensible.
Some trustees also prepare a separate deed of appointment for capital distributions, particularly where assets other than cash are being transferred. The trust's lawyers can advise on the form required.
Identifying beneficiaries at distribution
Payment providers and banks have their own obligations here. Under Canadian rules for money services businesses, the trustees, settlor, known beneficiaries and protector of a trust must be identified. For discretionary trusts, a beneficiary must be identified when they are named or when they receive a distribution.
This means a distribution to a beneficiary who has not previously been identified triggers a request for that person's identity documents. A grandchild who has just turned eighteen, a new spouse added by deed, or a beneficiary living abroad who has never had contact with the trustee, will all need to be identified before or at the time of the payment.
Trustees can avoid delay by collecting the documents in advance. Where a distribution is planned, ask the beneficiary for a current passport, proof of address and the details of an account in their own name. Send these to the provider with, or ahead of, the instruction. For beneficiaries who are minors, payments are usually made to a parent or guardian, or applied directly for the child's benefit, and the provider will want to understand the arrangement.
Paying the right account
A distribution should normally go to an account in the beneficiary's own name. This gives the clearest audit trail and the least risk that the payment is misdirected. Where the beneficiary asks for payment to someone else, such as a property lawyer completing a purchase or a university, the trustees should check the arrangement and keep the supporting document. Paying a lawyer's client account for a house purchase is common and reasonable. Paying a business acquaintance of the beneficiary, with no explanation, is not.
Bank details should be confirmed through a channel other than the one used to send them, particularly where details arrive by email. Payment fraud aimed at trustees and family offices often relies on a forged email changing account details at the last minute. A quick telephone call to a known number is the simplest defence.
Choosing the currency
Trust funds are frequently held in one currency while beneficiaries live and spend in another. A trust holding euros may pay a beneficiary in Canada, another in Hong Kong and a third in Switzerland. The distribution resolution should say whether the amount is fixed in the trust's currency or in the beneficiary's currency, because the difference matters when rates move.
If the trustees resolve to distribute an amount in Canadian dollars, the cost in euros will only be known when the conversion is made. If they resolve to distribute an amount in euros, the beneficiary will receive whatever that converts to on the day. Either approach is fine, provided the resolution is clear. Where a beneficiary needs a precise sum, for example to complete a property purchase, fixing the amount in the destination currency is usually the better choice.
Trustees with large or regular distributions in other currencies may want to discuss timing and execution with their FX provider. Our page on foreign exchange describes the general approach.
Timing and batches
Several things affect when a distribution actually arrives: the date the trustees resolve, the date any consent is received, how quickly the beneficiary's documents are verified, the cut-off times of the currency being sent, and public holidays in both countries. Trustees should leave room in their planning for each of these, especially around year end when beneficiaries often expect payments.
Annual or periodic distributions to several beneficiaries are well suited to a batch payment, where the trustees approve one file covering every recipient. Each line in the batch should match the resolution: beneficiary, amount, currency and account. A batch saves effort, but it does not reduce the checks on each payment, so beneficiaries who have not yet been identified should be cleared before the batch is submitted.
Loans, benefits in kind and payments for a beneficiary
Not every benefit takes the form of cash sent to a beneficiary. Trustees sometimes lend money to a beneficiary instead of giving it, which keeps the value inside the trust and can be recalled later. A loan should be documented with a written agreement, clear repayment terms and a decision recording why a loan was chosen over an outright distribution. The payment provider will see a transfer to the beneficiary either way, so the instruction should say which it is.
Trustees may also let a beneficiary live in a trust-owned property, or pay bills directly on a beneficiary's behalf. Paying a school or a hospital is often cleaner than sending money to the beneficiary to pay it, because the trust's records then show exactly what the money was used for. The resolution should still name the beneficiary who benefits, and the provider may still need that beneficiary identified, since the payment is made for their benefit.
Where trust assets other than cash are transferred, such as shares in a company, the trustees will need the appropriate transfer documents and possibly valuations. These fall outside a payments provider's work, but any related cash movements, such as stamp duty or legal fees, will follow the usual expense route.
Common pitfalls
- Paying someone outside the class. A step-child or partner may not fall within the definition of beneficiaries unless added by deed. Check before paying.
- Back-dated paperwork. Writing up a resolution after the money has gone undermines the record and is easily spotted by auditors.
- Treating a request as an instruction. A beneficiary or settlor asking for money does not oblige the trustees to pay it.
- Ignoring the currency question. A resolution for 100,000 with no currency stated invites dispute.
- Late identification. Collecting a beneficiary's documents only after the payment has been rejected.
- Changing bank details on email alone. The most common route for fraud against trust accounts.
After the payment
Once the payment is made, the trustee should attach the payment confirmation to the resolution on the trust file and update the trust accounts. Many trustees send a short letter to the beneficiary recording the distribution, its character as income or capital, and any tax information the beneficiary may need.
Keep the records for the full period required by the governing law and by the trustee's own regulator. Distributions are among the first things examined if a trust is later challenged by a beneficiary, reviewed by a tax authority or audited.
General information only
This article is general information about how discretionary distributions are commonly handled. It is not legal or tax advice. The terms of the trust deed and the law of the trust govern each decision, and the tax consequences of a distribution can be significant for both trust and beneficiary.
CCYFX makes single and batch distributions in multiple currencies on trustee instruction. See our page on international payments for more.
