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 family’s specific needs.
What a Discretionary Trust Is
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.
Choosing a Trustee
The choice of who will be the trustee of a discretionary trust will obviously be an important decision, given how much control they will have over the assets and their distribution. You can choose a singular trustee or two co-trustees, if you’d prefer to have choices made with a consensus. You may choose a family member, but you do not have to, and in some cases it may be in everyone’s best interests to leave family members out of the process of deciding when and how another beneficiary receives funds. Talk to your estate planning attorney about who makes the most sense in your situation. At Davis Law Group, we provide trustee services to our clients, so if you’d like an objective third party who understands your personal wishes to manage the trust, we are here for you. Contact us today.