Leaving your hard-earned assets outright to your children, grandchildren or other beneficiaries after you die will make their inheritance easy prey for creditors, predators, and divorcing spouses. Instead, consider using discretionary trusts for the benefit of each of your beneficiaries.
What is a Discretionary Trust?
A discretionary trust is a type of irrevocable trust that is set up to protect the assets funded into the trust for the benefit of the trust’s beneficiary. This can mean protection from the beneficiary’s poor money-management skills, extravagant spending habits, personal or professional judgment creditors, or divorcing spouse.
Under the terms of a typical discretionary trust, the trustee is limited in how much can be distributed to the beneficiary and when the distributions can be made. You can make the terms and time frames as limited or as broad as you want. For example, you can provide that distributions of income can only be made for health care needs after the beneficiary reaches the age of 21, or you can provide that distributions of income and principal can be made for health care needs and educational expenses at any age.
An added bonus of incorporating discretionary trusts into your estate plan is that the trusts can be designed to minimize estate taxes as the trust assets pass down from your children to your grandchildren (this is referred to as “generation-skipping planning”). In addition, you can dictate who will inherit what is left in each beneficiary’s trust when the beneficiary dies, which will allow you to keep the trust assets in the family.
While the distribution choices that can be included in a discretionary trust are virtually endless (within certain parameters established under bankruptcy and creditor protection laws), the bottom line is that a properly drafted discretionary trust will protect a beneficiary’s inheritance from creditors, predators, and divorcing spouses, avoid estate taxes when the beneficiary dies, and ultimately pass to the beneficiaries of your choice.
Where Should You Include Discretionary Trusts in Your Estate Plan?
Discretionary trusts should be included in all of the trusts you have created that will ultimately be distributed to your heirs, including:
- Your Revocable Living Trust
- Your Irrevocable Life Insurance Trust
- Your Standalone Retirement Trust
What Should You Do?
If you are concerned that your children, grandchildren, or other beneficiaries will not have the skills required to manage and invest their inheritance or will lose their inheritance in a lawsuit or divorce, then talk to your estate planning attorney about how to incorporate discretionary trusts into your estate plan.
Gratia specializes in providing comprehensive solutions in Estate Planning, Probate, Family Law, and Business Formation. Whether guiding families through the intricacies of estate planning, navigating the probate process, or advising on business and family law matters, Gratia ensures every client feels respected, informed, and confident. Her approach is characterized by clear communication and tailored strategies that reflect the specific needs and values of her clients.
Gratia is deeply embedded in the local area, often participating in community outreach and educational programs. She offers both virtual and in-person consultations to meet the diverse needs of her clients.
