A discretionary trust can protect against mismanagement of trust funds.
Those who desire to avoid probate often utilize trusts in their estate plans.
This is accomplished through retitling assets to the trust.
Because the assets are not under your name, they are not included in your personal probate estate.
According to a recent The Facts article titled “Your Estate Plan Could Improve with This Type of Trust,” a trust involves a legal arrangement for the management of the funds held by the trust.
In a traditional trust, the grantor outlines directions for the management of the trust assets.
The trustee must then follow these instructions.
Trusts can be either revocable or irrevocable.
With a revocable trust, the grantor can transfer assets in and out or dissolve the trust as long as the grantor is alive.
With an irrevocable trust, assets are permanently transferred to the trust.
Although the grantor can provide instructions on the amount of trust assets to be distributed to beneficiaries as well as the timeline for these distributions, the trustee makes decisions on how interest and principal are distributed.
One type of irrevocable trust is a “discretionary” trust.
With a discretionary trust, the trustees can also utilize their discretion for the distribution of assets to beneficiaries.
This gives the trustee significantly more authority.
Why would a discretionary trust be helpful?
This trust can prevent the trust assets from being mismanaged by beneficiaries.
It can also protect the trust funds from lawsuits and creditors because they are owned by the trust and trustee rather than the beneficiaries of the trust.
Events like the divorce of a beneficiary can also create concerns and confusion on the use of trust funds.
In situations like these, discretionary trusts can be helpful.
Prior to creating a discretionary trust, you will need to make several decisions.
You will need to decide who you would like to serve as the trustee or successor trustee as well as who you will designate as beneficiaries.
It is important to consider how and when you would like the beneficiaries to receive asset distributions.
In addition, you should carefully consider what assets you would like to move into the trust.
This type of trust protects against poor financial habits of heirs, provides estate tax benefits, and preserves generational wealth.
Despite these benefits, the permanence of an irrevocable trust demands careful consideration and thorough conversations with an experienced estate planning attorney.
Reference: The Facts (March 7, 2022) “Your Estate Plan Could Improve with This Type of Trust”