People use many different terms to describe the various types of trusts.
Other posts have discussed the differences between revocable and irrevocable trusts.
Another way to characterize trusts is as “discretionary.” Discretionary trusts can be revocable or irrevocable. The term discretionary simply refers to the manner in which assets can be distributed.
Discretionary Trust 101
A “discretionary trust” gives the trustee discretion over how, when, and if assets can be distributed to or for the benefit of the trust beneficiaries. Certain uses of the trust funds are permissible, or even mandatory, whereas other uses will be restricted.
Acceptable & Unacceptable Uses of Assets
Most discretionary trusts permit the trustee to use their discretion to make distributions for the health, education, and maintenance of a trust beneficiary. That means that the trustee decides whether to make distributions based on their assessment of the beneficiaries’ current and expected future needs.
If a beneficiary has creditor problems or is facing a divorce, a trustee can stop making distributions. If the beneficiary develops substance abuse problems, or is just generally irresponsible with money, the trustee can make payments on the beneficiary’s behalf – such as paying rent directly to the landlord – without enabling the beneficiary’s mismanagement of funds.
Although trustees of discretionary trusts have wide latitude to decide whether and when to make distributions, they are required to exercise their discretion fairly. If a trustee acts arbitrarily or unfairly in deciding whether or not to make distributions, they may be sued for breaching their duties to the beneficiaries.
Benefits of a Discretionary Trust
A discretionary trust can build a wall around assets and help protect the estate from creditors, and protect beneficiaries from themselves..
An ex-spouse, creditor or plaintiff in a lawsuit against the beneficiary will have a difficult time accessing assets held in the trust. Nothing is foolproof, of course, but a discretionary trust can make access very difficult.
If you’re encountering a dispute over a discretionary trust, the experienced legal team at Gaslowtiz Frankel can help. We’ve been handling trust disputes successfully for more than three decades. Contact us today for a consultation.
