Question: What kinds of tax obligations affect a beneficiary of a discretionary trust?Answer:
The tax obligations of a beneficiary vary depending on the nature of the distribution they receive under the trust.
A discretionary trust is used by some individuals as a tax rate arbitrage tool. If you are a self-appointed beneficiary of your discretionary trust, and you distribute money to yourself from the trust, it will be taxed according to your personal taxable income. If you fall within a high tax bracket, you will be taxed more heavily than if you had a lower income.
If you were to appoint a beneficiary to a trust other than yourself, the monies distributed from the trust would be taxed according to the income of that beneficiary. In this way, tax obligations of beneficiaries may be manipulated in order to make the most of your discretionary trust.