Discretionary trust trustee duties: what to expect from your trustee

In a discretionary trust, no beneficiary has a fixed entitlement. The trust deed gives the trustee the power to decide who receives what, and when. Understanding discretionary trust trustee duties therefore means understanding how that power is used in practice, and what you can reasonably expect to see: reasons, records and replies.

The clearest way in is a distribution request. Almost everything a discretionary trustee does well, or badly, shows up when a beneficiary writes in and asks for a payment.

What "discretion" means for a trustee

Discretion is not freedom to do as the trustee pleases. It is a power held on behalf of others, exercised for the purposes the trust deed sets out. A trustee has to act in good faith, take relevant matters into account, leave irrelevant ones aside, and avoid decisions no reasonable trustee would reach.

Under Swiss law the trust has no legal personality of its own, and the trustee holds the assets as the legal owner in a fiduciary capacity. That is why the quality of the trustee's process matters so much: the trustee is the one who decides, and the one who answers for the decision. For the wider duties owed to beneficiaries, see what a trustee owes the beneficiaries.

Three sources of guidance

A discretionary trustee rarely decides in a vacuum. Three documents and people shape the decision:

• The trust deed, which defines the class of beneficiaries, the purposes of the trust and any limits on distributions.
• The letter of wishes, a non-binding note in which the settlor explains how they hope the power will be used. A good trustee reads it carefully and asks for updates as circumstances change; see letters of wishes and your trustee.
• The protector or advisory committee, where the deed provides one, acting as a counterweight. How this works day to day is covered in working with a protector.

The letter of wishes guides; it does not bind. The trustee keeps the decision, which is exactly why a record of the reasoning is valuable.

A distribution request, from letter to resolution

The diagram shows the usual path. The detail below it follows one illustrative example.

Example (fictional): a family established in Lausanne has a discretionary trust set up by a grandmother. One grandchild asks the trustee for a distribution towards a first home. The trustee confirms she is within the class of beneficiaries, then asks what other resources are available to her and whether the purchase fits the purposes described in the deed. It re-reads the grandmother's letter of wishes, which mentions education and housing as priorities, and checks that the trust holds enough liquid assets without forcing a sale elsewhere.

The deed requires the protector's consent for larger distributions, so the trustee sends the protector a short paper setting out the request and its own view. Once consent is given, the trustee passes a written resolution: it records the request, the factors weighed, the consent, and a condition that the funds go directly towards the purchase. The grandchild receives a reply explaining the outcome, and the payment is logged in the trust accounts.

None of this is exotic. What matters is that every step leaves a trace.

What a good decision record contains

A resolution is the trustee's evidence that discretion was exercised properly. At a minimum, expect it to show:

• who asked, and in what capacity;
• the power relied on in the trust deed;
• the factors considered, including the letter of wishes;
• any consultation with the protector or advisers;
• the decision, its conditions and its date.

Records like these also help a successor. If the trustee changes, the incoming trustee inherits the history and can see how discretion has been used. For what the outgoing trustee should hand over, see the handover file.

What beneficiaries can and cannot expect

Beneficiaries of a discretionary trust usually have no right to a distribution. They can expect their request to be considered honestly, within the deed. Depending on the deed and the circumstances, they may also be entitled to certain information, though the extent varies. The page on information your trustee must give you sets out the usual questions.

The service itself lists limited disclosure of the structure to beneficiaries as a feature. That does not mean secrecy for its own sake: the settlor may prefer that beneficiaries do not see the full picture, yet the trustee must still respect what the deed, the law and any court may require. If tensions arise, see a dispute between beneficiaries and the trustee.

Beyond distributions

Discretion also covers matters that never reach a beneficiary's inbox: how long to retain an investment, whether to accumulate income, whether to lend to a beneficiary, and when to review the structure. A trustee who administers a discretionary trust will also keep the accounts, maintain the beneficiary register and meet its anti-money-laundering obligations. These routine tasks are explained in day-to-day trust administration.

As a Swiss-based professional, the trustee is subject to supervision. Under art. 61 LEFin, trustees fall under FINMA supervision, which involves a supervisory organisation; day-to-day oversight is carried out by supervisory organisations authorised by FINMA. What that approval means for you is explained in FINMA and SO-FIT: what trustee approval means.

What the service covers, and what it does not

For a discretionary trust, the service covers:

• the trustee's discretion over the timing and size of distributions;
• the ability to adapt to changing family needs over time;
• limited disclosure of the structure to beneficiaries;
• support for multi-generational planning;
• integration of a protector or advisory committee as counterweights.

It does not cover tax advice for your personal situation, a comparison of jurisdictions, or a guarantee about how any authority or court will view a given distribution. Tax treatment depends on the type of trust and on the settlor's domicile when it was created. Under the federal tax guidance, an irrevocable discretionary trust is treated differently depending on whether the settlor lived in Switzerland or abroad at that time, which is why an individual analysis is needed.

What a confidential assessment can establish

An assessment is a reading exercise. It can clarify:

• whether your deed gives the trustee real discretion, and over what;
• how the letter of wishes is used, and whether it is current;
• whether the protector's role is workable;
• how past requests were handled and recorded;
• whether the current arrangement suits the family, or whether a change should be considered. See switch trustee or stay and fix.

Fees depend on the structure and are discussed after the confidential assessment.