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What Are Discretionary Trusts?
Discretionary trusts are where the distributions to the beneficiaries are not set or fixed, but rather are determined by general guidelines set forth in the trust instrument. The trust instrument is created by the estate holder, and may contain guidelines that the trustee (a third party administrator) must follow when managing trust distributions to beneficiaries.
Thus, discretionary trusts are so named due to the fact that the trustee may often have much discretion both to manage and invest the trust funds in a professional manner. Discretionary trusts are among the most common types of trusts that are used in connection with estate planning.
What Is the Role of a Trustee in a Discretionary Trust?
In a discretionary trust, the trustee may take on a more influential role than in other types of trusts. For instance, in a custodial trust, it is the beneficiaries who often have authority to make decisions regarding the trust funds. However, in a discretionary trust, the trustee may be authorized to:
- Make distributions to beneficiaries according to the guidelines in the trust document
- Make distributions according to their own reasonable and prudent judgment
- Make decisions about whether to invest the trust account funds into securities, in order to help the funds grow
- Make decisions regarding the amount, and the timing of the monetary distributions to beneficiaries
In addition, the trustee in a discretionary trust often has various legal and fiduciary duties, such as the duty to remain loyal to the trust, and the duty not to commingle their own funds with the trust funds. Generally speaking, one of the main features of a discretionary trust is that the property owner has transferred all or most of the decision-making capabilities to the trustee.
How Are Discretionary Trusts Beneficial?
One of the most common uses of a discretionary trust is to prevent the beneficiaries from abusing the trust funds by collecting on them too soon. For instance, if the beneficiary is a young minor, or has a history of overspending, the trust funds can be distributed according to the judgment of the trustee, who can evaluate whether or not the beneficiary would be mature enough (or of legal age) to receive the money or property.
Also, discretionary trusts help relieve the estate holder of the various tasks and decisions that need to be made regarding the trust. By having the trustee assume a more outstanding role, the estate holder can concentrate on other matters. This can also be helpful if the estate holder is incapacitated and can’t make legal decisions on their own.
Lastly, discretionary trusts are often desirable due to their flexibility. Rather than being controlled by specific instructions, the trustee has the ability to adapt to different circumstances, and can even make decisions in anticipation of foreseeable changes.
How Are Disputes Over Discretionary Trusts Processed?
While discretionary trusts have many benefits, they can sometimes lead to a trust dispute. One of the main forms of legal disputes is where the trustee has failed to uphold their duties, or has abused their trust authority in some way. For instance, if the trustee withholds a distribution to a beneficiary in a way that is illegal, they could become liable for damages to the beneficiary.
Discretionary trusts are generally processed through a civil lawsuit in a court of law. Much of the litigation will revolve around the trust document itself. That is, courts will prefer to look to the written trust instrument before examining the oral testimony of any one witness. Thus, it is very important for a discretionary trust document to be clearly written, and reviewed by an attorney if possible.
Disputes over discretionary trusts may result in a damages award. In some cases, the dispute can also involve criminal consequences, if there were instances of malicious or intentional violations.
Do I Need a Lawyer for Help with a Discretionary Trust?
Discretionary trusts are one of the more common forms of trusts. They can be very helpful for the different parties involved, but they should be carefully drafted and reviewed. Also, it’s a good idea to place emphasis on selecting a good trustee, as this person will be able to control much of the trust activity. If you have any questions or need legal representation in a lawsuit, you may wish to hire a competent trusts attorney in your area for assistance.
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Last Modified: 09-30-2016 02:23 PM PDT
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