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How Does a Discretionary Trust Work? - Werner Law Firm

How Does a Discretionary Trust Work?

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Written by Troy Werner

Troy Werner has been an indispensable asset to The Werner Law Firm since joining in 2009, providing exceptional legal service to its clients.

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POSTED ON: July 15, 2022

Discretionary trusts can be established for various reasons, making them an asset in any estate plan. Their flexibility allows you to utilize trust as the glue to any estate plan. This plan means your will and powers of attorney prepare contingencies for incapacity or ensure the distribution of your estate upon death. A trust can […]

Discretionary trusts can be established for various reasons, making them an asset in any estate plan. Their flexibility allows you to utilize trust as the glue to any estate plan. This plan means your will and powers of attorney prepare contingencies for incapacity or ensure the distribution of your estate upon death.

A trust can ensure that more complex portions of your estate are managed and distributed according to your needs and wishes without complicating probate or leading to unexpected costs and difficulties down the line. Some assets and circumstances require more complex trusts than others.

For example, suppose you cannot trust your beneficiaries to care for themselves and the support you plan to bequeath them. In that case, it makes sense to figure out a way to help them benefit from their inheritance without fully managing it. Certain trusts can help in these situations, including discretionary trusts.

What Is a Discretionary Trust?

Establishing a discretionary trust places a greater authority on the managing trustee, allowing them to manage the trust at their discretion for the greater good of an associated beneficiary. The trustee exercises discretion when handling this type of trust. Discretionary trusts are ideal for minor heirs.

For example, giving them time to grow up and develop financial acumen before taking on the full responsibility of their inheritance while allowing them to continue to benefit from your financial legacy through the actions of your chosen trustee. A discretionary trust protects adult beneficiaries from themselves and outside influences, such as certain creditors.

Discretionary Trusts vs. Other Trusts

living trust is generally between the grantor, the trustee, and the beneficiary. The grantor may also be a managing trustee for as long as they are still alive, naming a successor trustee to take their place afterward. Trusts wherein the grantor continues to play a significant role are usually limited in the protection they offer.

Under certain circumstances, assets in a revocable trust are subject to creditor claims and count towards an estate's tax exemption limit. The contents of an essential revocable living trust do not have to enter probate but still count towards the estate's total value. In this situation, probate lawyers are crucial to guide you through the probate process.

Most trusts have a set schedule for how to distribute their funds. Trusts are entities created with the sole purpose of managing assets, which can be costly over time. A trustee must continuously manage the assets held within a trust for its entire term, which may end shortly after the grantor's death or carry on for multiple generations.

Nearly every detail of how a trust should work is in the trust's primary document, a signed and notarized legal copy detailing the trust's inner workings per the grantor's wishes and best judgment. A trustee's job, no matter how they feel, is to continue to manage a trust within the framework the grantor provides while looking out for the beneficiary's best interests.

Discretionary trusts have just one significant detail changed – the trustee plays a more prominent role in how the confidence continues to function after the grantor's death. This role gives the trust more flexibility. The grantor can continue to make administrative decisions for the health of the confidence and the well-being of the beneficiary.

This agreement means that confidence in your trustee is paramount to the effectiveness and reliability of a discretionary trust. In this case, an irrevocable trust can be issued by the grantor. However, this creates one primary concern – with the trustee in charge, a grantor has little control over how a trust will continue to operate after they die.

Naming the Right Trustee

The crux of a discretionary trust lies in the competence, professionalism, impartiality, and judgment of the trustee. To that end, it might be better for you to name an institutional trustee rather than a friend or close family member. In other words: consider asking a law firm or a bank to take on the role of managing the financial details of your trust and following the basic guidelines you have established while prioritizing the well-being and economic health of your chosen beneficiary.

Discretionary Trusts and Asset Protection

We have established that a discretionary trust can help beneficiaries save them from their decision-making by naming a more responsible trustee to manage a beneficiary's wealth in the long-term and provide them with a stricter income schedule over a period spanning years or decades. But how does a discretionary trust allow for asset protection?

Because the contents of the trust are not owned or managed by your beneficiary, any creditors your beneficiary might have will be unable to claim anything held in trust as long as your trustee does not pay the beneficiary. Distributions are not necessarily scheduled constantly but are withheld if they are sure to be claimed by a creditor so long as the trustee has the power to withhold distributions at their discretion. This is part of the critical feature of a discretionary trust.

The trustee can determine whether the beneficiary should receive any distributions or whether the trust should withhold them for a time until the beneficiary turns their situation around. In a way, discretionary trusts also act as a form of financial discipline for a spendthrift beneficiaries, as they will no longer receive distributions from the trust if they fail to control their spending habits or incur too many debts.

Do You Need a Discretionary Trust?

Discretionary trusts make sense if you have a trustee you have complete confidence in and one or more beneficiaries who may not necessarily have the financial acumen or the experience needed to manage the trust. The trust's contents will adequately and effectively manage an inheritance shortly after your death.

If you are concerned that your children, grandchildren, or other beneficiaries will not have the skills to manage and invest their inheritance or will lose their inheritance in a lawsuit or divorce, contact Werner Law Firm today about how to incorporate discretionary trusts into your estate plan.

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