A discretionary trust is a type of trust meant to benefit its beneficiaries. Unlike many other trusts, a discretionary trust does not contain any set rules or fixed amounts regarding its allocation stage.
Instead, the person designated as trustee will be given broad guidelines to follow. However, how and when the trust contents get dispersed will ultimately be left for the trustee to decide.
Thus, discretionary trusts are so named because the trustee often has much discretion over managing and investing the trust funds, so long as it is accomplished professionally.
Also, discretionary trusts are among the most typical types of trusts used with estate planning.
What Is the Role of a Trustee to a Discretionary Trust?
When a discretionary trust is created, the trustee may take on a more influential role than in other types of trusts. For instance, in a custodial trust, the beneficiaries often can determine the trust funds.
In a discretionary trust, however, the trustee may be approved to do any of the following:
- Make distributions to the beneficiaries following the guidelines laid out in the trust document;
- Make their own set of directions for allocation by depending on their own reasonable and prudent judgment;
- Make judgments about whether to invest the trust account funds (e.g., into securities) to help the trust’s funds increase; and
- Determine and set guidelines for the amount that should be distributed and when that amount should be distributed to beneficiaries.
Furthermore, the trustee to a discretionary trust generally has various legal and fiduciary duties that they must fulfill, such as staying faithful to the trust and not combining their funds with those contained in the trust.
One of the significant features of a discretionary trust is that the property owner will have transferred all the decision-making capabilities to the trustee.
How Are Discretionary Trusts Beneficial?
One of the most significant advantages a discretionary trust can deliver for its settlor is that it prevents the beneficiaries from abusing the trust funds by collecting them too soon.
For example, suppose the beneficiary is a young minor or has a history of overspending. In that case, the trust funds can be set up so that they get distributed according to the trustee’s judgment.
This is because the trustee can be given the ability to consider whether or not the beneficiary would be mature enough (or of legal age) to acquire the money or property and use it responsibly.
In addition, a discretionary trust helps to ease the estate holder of the various jobs and judgments that need to be made concerning the trust. Having a trustee step in to take over this significant role allows the estate holder to ease off and concentrate on other matters.
Ultimately, discretionary trusts are often desirable due to their flexibility. Rather than being governed by specific instructions, a trustee can adjust to different circumstances that may arise and can even make judgments in anticipation of foreseeable changes.
How Are Conflicts Over Discretionary Trusts Managed?
While setting up a discretionary trust can have many benefits, it can sometimes lead to a trust dispute. One of the main issues that arise during a conflict involving a discretionary trust is when a trustee has failed to carry out their legal trust responsibilities or has abused their power over the trust somehow.
For example, if a trustee illegally withholds the distribution of property from a rightful beneficiary, then they might have to pay damages to that beneficiary for their illegal activities.
Generally speaking, discretionary trust quarrels are generally regulated by filing a civil lawsuit with the court. Much of the litigation will usually concentrate on the trust document itself.
In other words, courts will choose to look to the written trust instrument before examining the oral testimony of any one witness. This is why a discretionary trust document needs to be written clearly and reviewed by an attorney if possible.
Lastly, conflicts over discretionary trusts can result in a damages award. In some circumstances, the dispute may also call for criminal consequences. This scenario might arise when hostile or willful breaches of the trust have transpired.
What Are Revocable Trusts?
Revocable trusts are formed during the lifetime of the trustmaker and can be modified, altered, changed, or withdrawn entirely.
Often called a living trust, these are trusts in which the trustmaker:
- Transfers the title of a property to a trust
- Serves as the initial trustee
- Has the capacity to remove the property from the trust during their lifetime
Revocable trusts are especially useful in avoiding probate. If the ownership of assets is transferred to a revocable trust during the lifetime of the trustmaker so that the trust owns it at the time of the trustmaker’s death, the assets will not be subject to probate.
Although applicable to avoid probate, a revocable trust is not an asset protection technique as assets transferred to the trust during the trustmaker’s lifetime will stay open to the trustmaker’s creditors. It makes it more challenging for creditors to access these assets since the creditor must petition a court to allow them to get to the assets held in the trust. Generally, a revocable trust develops into an irrevocable trust upon the death of the trustmaker.
What Is an Asset Protection Trust?
An asset protection trust is a kind of trust created to protect a person’s assets from claims of future creditors. These trusts are often set up in countries outside the United States, although the assets do not always need to be transferred to a foreign jurisdiction. The objective of an asset protection trust is to insulate assets from creditor attacks.
These trusts are typically structured so that they are irreversible for years and so that the trustmaker is not a contemporary beneficiary. An asset protection trust is typically structured so that the undistributed assets of the trust are returned to the trustmaker upon the trust’s termination, provided there is no present threat of creditor attack, thus allowing the trustmaker to retrieve total control over the formerly protected assets.
What Is a Charitable Trust?
Charitable trusts benefit a particular charity or the public in general. Generally, charitable trusts are designated as part of an estate plan to lessen or avoid estate and gift tax imposition.
A charitable remainder trust (CRT) financed during the grantor’s lifetime can be a financial planning instrument, providing the trustmaker with useful lifetime benefits.
In addition to the economic benefits, the intangible advantage of rewarding the trustmaker’s generosity as charities usually immediately honor the donors who have named the charity the beneficiary of a CRT.
Do I Need to Hire a Lawyer for Help with a Discretionary Trust?
As discussed above, discretionary trusts are among the more common types of trusts that people tend to create. Although they can provide many advantages to the different parties associated with the trust, it is necessary that the discretionary trust be drafted carefully and reviewed for legal enforceability before finalizing it.
Additionally, it is also good to be cautious about the person being selected as the loyal trustee since they will be the primary person in control of much of the trust activity.
You may want to consider hiring a qualified trust lawyer in your area for further assistance.
