What Should I Know about a Discretionary Trust?

With the variety of trusts available, you may find a particular type that will best serve your current family situation. Right now your adult children may be struggling with personal issues that result in reckless spending or poor financial decisions. Creating a discretionary trust may be of benefit to your family.

Many trusts allow the trust creator to implement controls over how and when a trustee pays assets from the trust. A discretionary trust differs because it gives a trustee greater power over the trust.

How a discretionary trust works

With many trusts, beneficiaries receive payments on a scheduled basis or if they meet particular thresholds. However, beneficiaries to a discretionary trust have no right to funds in the trust. According to Bankrate, while the intention of a discretionary trust is to provide for beneficiaries, the trustee retains authority to dispense payments as he or she sees fit.

This means that the trustee has the discretion to monitor the actions of beneficiaries and determine their fitness to receive money. If the trustee decides the beneficiary will waste the money or use it for harmful purposes, the trustee may deny the beneficiary any money.

Who discretionary trusts are for

Parents generally set discretionary trusts up for children in particular situations. These scenarios may include the following:

  • Children struggling with debt or bankruptcy
  • Children with disabilities or mental impairments
  • Poor spending habits or gambling problems
  • Children who are immature or irresponsible

In addition to protecting money from bad spending decisions, a discretionary trust also shields assets from creditors. If your child owes a lot of money, a creditor cannot claim money in a discretionary trust since the money belongs to the trust and not your child.

Promoting accountability

The degree of power a trustee will have in this situation might alarm you. Still, there are safeguards you may set up to prevent a trustee from abusing the power of a discretionary trust. Some people name appointers who could remove the trustee and choose a new one in the event of abuse. Another option is to name a guardian with the power to veto the spending decisions of the trustee.