Discretionary Trusts

The discretionary trust: flexibility and protection

The discretionary trust is the most widely used form of trust in international practice. Its defining characteristic lies in the power granted to the trustee to decide, at its discretion, how to distribute the income and capital of the trust among a class of beneficiaries defined in the trust deed. No beneficiary holds a vested interest in the assets — they have only a mere expectancy.

This flexibility makes the discretionary trust a preferred instrument for succession planning, asset protection and family governance. The trustee can adapt distributions according to evolving beneficiary needs, legislative changes or economic circumstances.

Advantages of a discretionary trust

• Asset protection: The trust assets belong neither to the settlor nor to the beneficiaries. They are shielded from the personal creditors of the beneficiaries, divorce proceedings and professional liabilities.
• Succession flexibility: The trustee can adjust distributions according to each beneficiary's actual needs, age, maturity and personal circumstances, without being bound by fixed shares.
• Adaptability: In response to legislative, tax or family changes, the trustee can modify its distribution strategy without amending the trust deed.
• Confidentiality: The discretionary structure limits the information that beneficiaries receive regarding the composition and value of the trust estate.
• Intergenerational governance: The discretionary trust enables the management of wealth transmission across multiple generations, preserving family unity and preventing asset fragmentation.

How it works in practice

In a discretionary trust, the settlor transfers assets to the trustee and defines a class of potential beneficiaries (for example, their children, grandchildren and their descendants). The trustee administers these assets and decides, using professional judgement and taking into account the wishes expressed by the settlor in a letter of wishes, when and how to make distributions.

The trustee is required to act in the interest of the beneficiaries as a class, impartially and prudently. It must regularly assess the needs of each beneficiary and document its distribution decisions. As a professional trustee licensed by FINMA, Swiss Trustee applies the strictest standards of governance and transparency in the exercise of its discretionary powers.

Control and governance mechanisms

Although the trustee has broad discretionary power, several mechanisms allow the exercise of these powers to be supervised:

• Letter of wishes: A non-binding document in which the settlor expresses their wishes regarding the management and distribution of trust assets.
• Protector: A trusted person with supervisory powers, such as a veto right over certain trustee decisions or the power to remove and replace the trustee.
• Advisory committee: A body composed of family members or advisers that may be consulted by the trustee on certain decisions.
• Trust deed provisions: Specific clauses governing the trustee's powers, for example by excluding certain types of investment or setting distribution thresholds.

Our team guides you in defining these mechanisms to achieve the optimal balance between trustee flexibility and the preservation of the settlor's intentions.