Trusts are one of many important tools that can be included in an overall estate plan. A discretionary trust is a particular type of trust that provides the trustee with broad discretion regarding how the trust property is managed and distributed. Unlike a fixed trust, beneficiaries of a discretionary trust can only receive distributions from the trust property when the trustee exercises his or her discretion to do so. So, if you are trying to determine what type of trust you need, let a trust lawyer explain everything you need to know about a discretionary trust.
What is a trust?
The importance of trusts in estate planning can be seen in the trust’s ability to minimize estate taxes and possibly avoid probate. A trust is basically a fiduciary agreement, one based on trust and confidence, between the person making the trust (grantor) and the trustee. This agreement gives the trustee the authority to manage the assets of the trust and distribute those assets to the beneficiaries as specified in the trust agreement. There are several different types of trusts with their own objectives.
How a discretionary trust works
The trustee of a discretionary trust can be given broad authority to use discretion in determining who will receive benefits from the trust and what those benefits will be. However, in creating a discretionary trust, your trust lawyer can help you determine whether the trustee will have both types of discretionary powers or one type or another. That all depends on your specific goals in creating this type of trust.
Trustees enjoy complete autonomy in performing their duties
A discretionary trust can also provide the trustee with the authority to add or exclude beneficiaries, thereby giving the trustee even more flexibility to deal with any unexpected changes in circumstances. Basically, with a discretionary trust, the beneficiaries are unable to compel the trustee to use the trust property in any particular way.
The duties of the trustee of a discretionary trust
Though trustees, in general, share some of the same duties, the duties of the trustee of a discretionary trust are very different in some respects. As a trust lawyer can explain, the trustee’s duties consist primarily of deciding how to exercise discretion in compliance with the terms of the trust and the applicable laws.
What makes a fixed trust different?
A trust lawyer understands that a fixed trust, unlike a discretionary trust, only allows the trustee control over the money and property held in the trust. In most cases, the beneficiary of a fixed trust will receive trust property on a specific schedule that is dictated by the person who created the trust. That means the trustee of a fixed trust is unable to modify any of the terms of a trust, including who the beneficiaries are and what benefits they can receive from the trust.
Some advantages of a discretionary trust
As any trust lawyer knows, discretionary trusts are more commonly used than fixed trusts. Actually, most so-called family trusts are discretionary in nature. One of best advantages of this particular kind of trust is that the assets are basically out of the reach of creditors unless the trustee decides to pay those creditors from the trust for the benefit of a particular beneficiary. If you specifically include a spendthrift clause, then there may be additional protections available for the trust assets and the beneficiaries.
Types of discretionary trusts
Discretionary trusts are generally divided into two categories: exhaustive and non-exhaustive. An exhaustive discretionary trust requires the trustee to distribute all of the income accruing to the trust fund. On the other hand, a non-exhaustive discretionary trust gives the trustee an express power to accumulate income.
The primary goals of a discretionary trust
Discretionary trusts serve a very useful function and are most commonly used for the following reasons:
- to provide protection to imprudent beneficiaries against creditors
- to impose more control over young beneficiaries
- to provide flexibility to respond to changes in circumstances
- to protect family assets from becoming a part of a divorce settlement
When property is transferred to a discretionary trust, you can be assured that the children will not be able to transfer the assets to another type of investment. This is very useful for those who want to see certain assets remain in the family.
Download our FREE estate planning checklist! If you have questions regarding a discretionary trust, or any other estate planning needs, contact the Northern California Center for Estate Planning and Elder Law for a consultation, either online or by calling us at (916) 437-3500.