Phone: (832) 408-0505
Schedule an Appointment

Gratia Schoemakers

Discretionary Trust

What Does a Discretionary Trust Mean?

By Leave a Comment

Sometimes giving assets outright to a beneficiary – such a child, a grandchild or a special needs loved one – is not the ideal method of distributing assets in an estate plan. In such a scenario, a discretionary trust can be a good estate planning tool. Below is some basic information on discretionary trusts and how they may be beneficial to your particular family’s needs.

Discretionary Trusts Explained

Discretionary Trust

A discretionary trust is a type of trust that is set up for the benefit of one or more beneficiaries. In this particular type of trust, however, the trustee is given full discretionary authority to decide when and what funds – such as principal or income – are given to which beneficiaries. In fact, the beneficiaries of a discretionary trust have no rights to its funds and these funds are not considered part of the beneficiaries’ estates. The only way the funds become subject to a creditor is once the funds are distributed to the beneficiary.  So long as they stay in the trust and the trustee is not required to distribute them to the beneficiary, they will remain safe.

Within a discretionary trust, you can provide specific guidance to the appointed trustee regarding when distributions may be made. You can choose distributions to be used toward particular uses. This can include health, education, maintenance, and support (HEMS). Similarly, a trustee can be directed to distribute funds upon a beneficiary’s completion of certain milestones – such as college graduation or completion of rehabilitation.

The Purpose of Discretionary Trusts

A discretionary trust can benefit several types of individuals. Aside from minors and those with special needs, others who may benefit from this type of trust includes those: with creditor issues as a result of debt; with drug or alcohol abuse problems; who need or may need governmental assistance in the future; who could be facing or are going through a divorce. Simply put, discretionary trusts are a good estate planning tool for those beneficiaries who may need extra assistance managing large sums of money.

Estate Planning Advice

If you or someone you know has questions about discretionary trusts – or any other estate planning issue – contact us to learn about your options.

Discretionary Trusts – How to Protect Your Beneficiaries from Bad Decisions and Outside Influences

By

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.