Chartered Accountant · ICAI M.No. 153926 · FRN 136869W
Specific vs discretionary
Specific = fixed shares, taxed in beneficiaries’ hands; discretionary = trustee’s discretion, often MMR.
Tax depends on structure
How you draft it drives the tax, so plan it carefully. Confirm treatment for your facts.
How the structure drives the tax
The tax outcome of a private family trust depends heavily on how it’s drafted, so the structure is where the planning sits. A specific (or determinate) trust — where the beneficiaries and their shares are fixed and identifiable in the deed — is generally taxed as though each beneficiary received their share directly, so the income is taxed in the beneficiaries’ hands (or assessed on the trustee as their representative) at the beneficiaries’ rates, which can be efficient where beneficiaries are in lower brackets. A discretionary trust — where the trustees decide who gets how much — is, by contrast, often taxed at the maximum marginal rate on its income, because the shares aren’t determinate, which removes the rate advantage. There are important exceptions and anti-avoidance rules: a trust created for a minor child, or one funded by transferring income-earning assets without adequate consideration, can attract clubbing, where the income is taxed back in the settlor’s hands. A testamentary trust (created by a will) for dependants can get more favourable treatment in some cases. Because a small drafting choice — specific versus discretionary, who the settlor is, how it’s funded — changes the tax materially, a family trust should be structured with advice up front. Confirm the treatment for your specific facts and the current rules.