What is a discretionary trust?
The discretionary trust is the most widespread form of trust in international wealth management. Governed by the Trusts Act 2001 in Mauritius, it is distinguished by the broad power it confers on the trustee over the distribution of the trust's income and capital.
Unlike a fixed trust, in which beneficiaries' rights are predetermined, the discretionary trust leaves the trustee entirely free to decide when, how, how much and to whom to distribute the trust's assets among the class of beneficiaries defined in the trust deed.
The fundamental point of the discretionary trust: beneficiaries hold no vested right over the trust's assets or income. They benefit from a mere expectation — the possibility of receiving distributions if the trustee so decides. This characteristic is the key to the maximum asset protection offered by this structure.
How the discretionary trust works
Key players and their roles
The settlor
Creates the trust, drafts the trust deed and transfers assets into it. Drafts the letter of wishes to guide the trustee. Once the trust is established, the settlor should not retain excessive control over the assets in order to preserve the validity of the structure.
The trustee
Holder of an FSC licence, the trustee manages the assets and exercises its discretionary power in accordance with its fiduciary duties (loyalty, prudence, impartiality, accountability). It is personally responsible for the management.
The beneficiaries
Designated by category ("the settlor's children and descendants") rather than individually. Having no vested rights, they are protected against creditors, divorce and litigation.
The protector (optional)
A trusted person overseeing the trustee. May have broad powers: veto over distributions, power to remove/appoint the trustee, add/exclude beneficiaries, approve major investments.
The trust deed
The trust deed is the founding document that establishes the terms and conditions of the discretionary trust. It defines:
- The scope of the trustee's discretionary power (absolute or bound by criteria)
- The class of eligible beneficiaries (broadly defined to maximise flexibility)
- The conditions or restrictions applicable to distributions (maximum amounts, age conditions, etc.)
- The trustee's investment powers (conservative, balanced, dynamic)
- The duration of the trust (up to 99 years under the Trusts Act 2001)
- The protector's powers (veto, appointment/removal, addition/exclusion of beneficiaries)
- The mechanisms for the appointment and removal of the trustee
- The provisions relating to amendment of the deed and dissolution of the trust
- The applicable law (Mauritian law) and the competent jurisdiction
The Letter of Wishes
The letter of wishes is a confidential document in which the settlor expresses their intentions and wishes. Although not legally binding, it is a valuable guide for the trustee:
- Distribution priorities among the beneficiaries
- The circumstances in which distributions should be made (education, marriage, property purchase, financial difficulties)
- The desired investment strategy (capital preservation, growth, regular income)
- The beneficiaries to favour or exclude in certain circumstances
- Intentions for future generations (preservation of capital, financial education of heirs)
- Wishes regarding philanthropy (donations to specific causes)
The major advantage of the letter of wishes is its flexibility: the settlor can amend it at any time, confidentially, without the formalities required to amend the trust deed.
Advantages of the discretionary trust
Maximum flexibility
The discretionary trust offers unmatched flexibility. The trustee can adapt distributions to the changing needs of beneficiaries, economic conditions and tax or regulatory developments. This flexibility is particularly valuable in a family wealth context where individual situations evolve over several decades.
Enhanced asset protection
The absence of vested rights for beneficiaries constitutes a particularly effective asset protection mechanism. A beneficiary's creditors cannot seize assets over which that beneficiary has no enforceable right. This protection extends to divorce, commercial litigation and personal bankruptcy proceedings.
Furthermore, the firewall provisions of the Trusts Act 2001 protect the trust against the application of foreign laws (forced heirship, matrimonial laws, confiscation) that could otherwise call into question the validity of the trust or the distributions made.
Optimised estate planning
The discretionary trust is a leading estate planning tool that makes it possible to:
- Transfer wealth outside the traditional inheritance framework and probate
- Ensure the continuity of wealth management beyond the settlor's death
- Protect family wealth across several generations (dynasty trust)
- Take into account the specific needs of each beneficiary (minors, disabled persons, inexperienced heirs)
- Avoid family conflicts by entrusting distribution decisions to a professional trustee
Tax efficiency
In Mauritius, a non-resident discretionary trust benefits from a total tax exemption (0%) on its foreign-source income. Mauritius also imposes no inheritance tax or gift tax. This combination, together with the network of tax treaties for resident trusts, makes it an attractive tax planning tool.
Structured confidentiality
The discretionary trust offers a high level of confidentiality. Details of distributions, the identities of beneficiaries and the letter of wishes are not accessible to the public. Only the regulatory authorities (FSC, MRA) can access this information in the course of their supervisory duties. FATCA/CRS obligations are met without compromising legitimate confidentiality.
Practical applications
Family wealth management
The trustee adapts distributions to the needs of each member: funding education, buying a first home, support in the event of financial difficulties or health problems. The letter of wishes guides these decisions.
Holding international assets
Centralised management of multi-jurisdictional assets: real estate (via holding companies), shareholdings, investment portfolios, works of art, digital assets. For families from civil-law jurisdictions, the foundation vs trust comparison can help guide the choice of structure.
Entrepreneurial protection
Entrepreneurs shelter part of their wealth from the risks linked to their business activity. The trust's assets are legally separate and cannot be seized in the event of commercial difficulties.
Structured philanthropy
The discretionary trust can serve as a vehicle for philanthropic activities, enabling the trustee to distribute funds to charitable causes according to the settlor's wishes and identified needs.
Discretionary trust vs fixed trust
| Criterion | Discretionary trust | Fixed trust |
|---|---|---|
| Trustee's power | Total discretion over distributions | Obligations defined by the trust deed |
| Beneficiaries' rights | Mere expectation (no vested right) | Vested and enforceable rights |
| Asset protection | Maximum (nothing to seize) | Moderate (attachable rights) |
| Flexibility | Maximum (adapts to circumstances) | Limited (predefined allocation) |
| Predictability for beneficiaries | Variable (depends on the trustee) | High (rights known in advance) |
| Suited for | Families, asset protection, succession | Equitable distributions, investors, contractual obligations |
Trustee's obligations
The trustee of a discretionary trust is subject to strict fiduciary obligations defined by the Trusts Act 2001:
- Duty of loyalty: act exclusively in the interest of the beneficiaries, never in its own interest
- Duty of prudence: manage the assets with the care of a diligent professional (prudent investor rule)
- Duty of impartiality: fairly consider the interests of all potential beneficiaries, without unjustified favouritism
- Duty to account: keep accurate accounting records and provide information to beneficiaries in accordance with the terms of the trust deed
- Duty of compliance: comply with the Trusts Act 2001, FSC regulations, FATCA/CRS obligations and AML standards
- Prohibition on conflicts of interest: not personally benefit from its position nor carry out self-dealing transactions
Failure to comply with these obligations can engage the trustee's personal liability, justify its removal by the protector or through judicial proceedings, and give rise to remedies for the benefit of the trust.
Setting up a discretionary trust in Mauritius
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Preliminary analysis
Assessment of your wealth objectives, your tax situation in all relevant jurisdictions, the nature of your assets and your protection and succession needs.
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Structuring and design
Determination of the optimal structure: class of beneficiaries, scope of the discretionary power, role and powers of the protector, investment strategy, duration of the trust.
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Legal drafting
Preparation of the trust deed, the letter of wishes and all ancillary documents by specialised lawyers.
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KYC/AML compliance
Full due diligence on the settlor, the beneficiaries and the protector: identity documents, proof of address, source of funds, source of wealth.
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Establishment and transfer of assets
Signing of the trust deed, appointment of the FSC-licensed trustee, registration, opening of bank accounts and transfer of assets into the trust.
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Ongoing administration
Management of investments, distributions to beneficiaries, regulatory reporting, tax compliance (filings, FATCA/CRS) and periodic review of the structure.
Disclaimer: This information is provided for guidance only and does not constitute legal or tax advice. Setting up a discretionary trust involves complex considerations that vary according to your personal situation, your tax residence and the nature of your assets. Consult a qualified adviser before making any decision.