As estate planning has gained popularity in recent years, trusts have received a great deal of attention. Whereas they were once considered tools of the elite super-rich, living trusts are now regularly discussed online and elsewhere by the media, lawyers, and other estate planning experts. For individuals and families who might be considering the addition of a trust to their own estate planning efforts, there has never been an easier time to discover how different estate planning tools can benefit their plan. Still, there’s one type of trust that doesn’t always get the attention it deserves: the discretionary trust. Could it be a solution to some of your more complex estate planning challenges?
What Is a Discretionary Trust?
The discretionary trust is setup with the same basic elements use to create other types of trusts: there is a grantor who creates and funds the trust, a trustee who handles trust assets for the benefit of the heirs, and named beneficiaries who ultimately receive the benefits of those assets. With this type of trust, the trustee is provided with a great deal of discretion when it comes to how and when assets are allocated to the named beneficiaries. That discretion makes this trust useful for a wide variety of special estate planning needs.
How Does a Discretionary Trust Differ from Most Other Trusts?
A discretionary trust operates in a different way than most fixed trusts. With a fixed trust, it is typically the trust terms that determine how the trustee manages the assets in the trust. Those terms provide the trust grantor with almost unlimited power to direct the distribution of assets, and generally leave the trustee with no leeway when it comes to allocating resources.
With a fixed trust, the grantor creates trust terms, and those terms direct the trustee to distribute assets according to a predetermined schedule or set of conditions. The terms also dictate how much those distributions will be, and which beneficiaries will receive them. The trustee has no power to change those terms or choose which beneficiaries receive which assets.
How Much Power Does the Trustee Have with a Discretionary Trust?
When you create a discretionary trust, you might think that you’re providing a great deal of control to the trustee that you assign to manage the trust. In reality, you’re simply giving the trustee the power to exercise his or her discretion. That discretion gives the trustee a tremendous amount of freedom when it comes to determining how assets are distributed. While he or she has a duty to protect those assets so that they can benefit those heirs, there is no duty to distribute them at any given time or to any specific beneficiaries.
In operation, the duties of the trustee really boil down to one simple decision: to distribute or not to distribute. Beneficiaries can request distributions. They can beg for assets when they need money. They can complain and demand and wail until their throats are hoarse. In every instance, however, the trustee has but one main duty to perform: agree to the distribution or deny it. When making that determination, the trustee must always consider the needs of all beneficiaries, and make decisions that are designed to meet the trust’s goals in a way that protects assets for everyone’s benefit.
Two Types of Discretionary Trust
These trusts can come in two varieties. The first is the exhaustive discretionary trust, and is designed to ensure that the trustee works to distribute every penny of income that comes into the trust over time. The non-exhaustive discretionary trust is more liberal in its approach, and provides the trustee with the power to grow the value of the trust over time.
How Common Are These Trusts?
If some of the benefits sound familiar, it’s because discretionary trusts are more common than most people realize. Many family trusts include discretionary features, especially when there are minor children involved in the trust. Special needs trusts are also discretionary in nature, as is any trust with a spendthrift provision. Because these trusts can ensure that creditors cannot gain access to the trust’s funds without the trustee’s consent, that discretion can prove to be an invaluable tool for protecting trust assets and beneficiary interests.
Why Would You Need a Discretionary Trust?
Do you have minor children that you want to protect if something happens to you? Then this type of trust can be a perfect way to secure their inheritance against unsavory predators and others who might want to consume their inheritance. Of course, there are other times when a discretionary trust can be an ideal solution. For example:
- Do you want to guard assets against your heirs’ creditors and ensure that wasteful heirs cannot simply fritter away their inheritance?
- Do you have young adults who may not be responsible enough to manage their inheritance without your help? You can avoid problems by providing your trustee with the discretion to decide how and when money gets distributed to those heirs.
- Are you concerned that an heir’s future divorce could result in your family’s estate assets ending up outside the family? This trust can help, by ensuring that the trustee can keep the funds in the family trust.
- Are you just worried about unknown factors that could be a concern later in life? A discretionary trust can provide the trustee with flexibility to keep pace with changing life concerns.
A Trusts Attorney Can Help!
Sometimes, it can be difficult to figure out which trust type will best meet your unique estate planning needs. Fortunately, a competent trusts attorney can help you decide whether a discretionary trust is the right option for your estate plan. The trusts experts at the Fouts Law Group, LLC have the experience you need to ensure that you have just the right trust to solve your estate planning challenges. If you’d like to consult with us and learn how a discretionary trust can help to resolve your trust concerns, then contact us online or give us a call at (404) 596-7520.
