Should I have a Discretionary Trust in My Estate Plan?
The trustee who oversees a discretionary trust can use their discretion in determining when and how trust assets should be distributed to beneficiaries. There are several reasons why you might consider establishing a discretionary trust. The Facts’ recent article entitled “Your Estate Plan Could Improve with This Type of Trust” explains that a trust is a legal arrangement in which assets are managed by a trustee on behalf of one or more beneficiaries. In a typical trust arrangement, assets are managed according to the directions and wishes of the settlor (also known as the trustmaker, grantor, or trustor).
However, with a discretionary trust, the trust lets the trustee have full discretion when overseeing the distribution of trust assets to beneficiaries. This is a type of irrevocable trust, which means that the transfer of assets is permanent. The grantor can provide direction about when trust assets should be distributed and how much each trust beneficiary should receive. However, it is up to the trustee to decide what choices are made with regard to distributions of principal and interest from trust assets. To be effective, the discretionary trust must also be a “spendthrift trust” under Louisiana law. A “spendthrift trust” does not allow the beneficiary to transfer, sell or convey the beneficiary’s interest in the trust (which would generally be permitted without the spendthrift clause).
In my experience, a discretionary trust is most often used in the following situations:
- The settlor is concerned that the trust assets will be subject to the claims of the beneficiary’s creditors
- The settlor is worried that the beneficiary will use trust assets for the purchase of drugs or other addicting substances
- The settlor does not trust a daughter or son in law, and is concerned that the trust assets will be lost in a divorce
- The settlor is conccerned that the beneficiary is suggestable and the assets will be transferred to “friends” of the beneficiary
- The beneficiary is irresponsible with money, and the settlor is worried that the trust assets might be lost in a bankruptcy proceeding.
A discretionary spendthrift trust can help to prevent mismanagement of assets on the part of beneficiaries. It can also offer protection against creditor lawsuits. The assets in a discretionary trust are protected because the trustee technically owns those assets, not the trust beneficiaries.
A discretionary trust can also be used in other situations where you may have concerns over how trust assets will be used, such as in the event a beneficiary divorces.
An experienced estate planning attorney can create a discretionary trust. When establishing the trust, you’ll need to decide:
- Who to name as trustee and successor trustees
- Which assets will be transferred to the trust
- Who to name as trust beneficiaries; and
- Under what situations you’d like assets to be distributed to beneficiaries.
It is an irrevocable trust. As a result, the transfer of assets is permanent. Therefore, be sure beforehand that this type of trust is appropriate for your estate planning needs.
Discretionary trusts can protect your beneficiaries from their own poor money habits, while preserving a legacy of wealth for future generations.
A properly structured discretionary trust can also have some estate tax planning benefits. Ask your attorney to explain this to you when you meet.
BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.
If you liked this article, “Straight Talk About Having a Will” read also these additional articles: Straight Talk About Having a Will and What are my Responsibilities if I’m Named an Executor? and Do Young Adults Need Estate Planning? and What Helps Create the Best End-Of-Life Plan?
Reference: The Facts (March 7, 2022) “Your Estate Plan Could Improve with This Type of Trust”