A discretionary trust is a trust in which the trustee decides which beneficiaries receive distributions, when, and in what amounts. No beneficiary has a fixed entitlement. The deed names a class of potential beneficiaries, typically "the settlor's spouse, children, and remoter descendants," and the trustee chooses among them, usually guided by the settlor's letter of wishes.
The design solves two problems at once. First, flexibility across time: a deed written today cannot foresee which grandchild will need medical care, which will marry badly, and which will sell a company. A discretionary trustee adapts; a fixed schedule cannot. Second, protection: because no beneficiary is entitled to anything until the trustee acts, there is nothing for a beneficiary's creditor, bankruptcy estate, or divorcing spouse to seize. A right to be considered is not an asset. Paired with a spendthrift clause, this is as close to creditor-proof as a beneficial interest gets.
The price is dependence on the trustee, which is why discretionary trusts travel with control mechanisms: letters of wishes, protectors with removal powers, and in modern offshore statutes, reserved powers for the settlor. Practically every structure in our jurisdiction guides, from the BVI to the Cook Islands to Jersey, is built on a discretionary chassis. The alternative, a fixed interest trust ("income to my wife for life, then capital to the children equally"), offers certainty at the cost of rigidity and exposure, and international families rarely choose it.
For tax purposes, discretion does not change who pays: a discretionary trust settled by a US person remains a grantor trust, taxed to the settlor.
Related terms: spendthrift trust, letter of wishes, grantor trust.