A discretionary trust is a type of trust that is meant to benefit its beneficiaries. Unlike many other kinds of trusts, a discretionary trust does not contain any set rules or fixed amounts regarding its distribution stage.
Instead, the person who is appointed as trustee will be given general guidelines to follow. However, how and when the trust contents get distributed will ultimately be left for the trustee to decide.
Thus, discretionary trusts are so named due to the fact that the trustee often has much discretion both over how to manage and to invest the trust funds, so long as it is accomplished in a professional manner.
What is the Role of a Trustee to a Discretionary Trust?
When a discretionary trust is formed, the trustee may take on a more influential role than in other types of trusts. For example, in a custodial trust, it is the beneficiaries who often have the authority to make decisions about the trust funds.
In a discretionary trust, however, the trustee may be approved to do any of the following:
- Make distributions to the beneficiaries in accordance with the guidelines laid out in the trust document;
- Create their own set of rules for distribution by relying on their own reasonable and prudent judgment;
- Make decisions about whether to invest the trust account funds (e.g., into securities), in order to help the trust’s funds increase; and
- Determine and set the guidelines for the amount that should be distributed from the trust, and the timing of when that amount should be distributed to the beneficiaries.
Also, the trustee to a discretionary trust typically has various legal and fiduciary duties that they must fulfill, such as the duty to remain loyal to the trust and the duty not to combine their own personal funds with those contained in the trust.
Most importantly, one of the main features of a discretionary trust is that the property owner will have transferred all (or the majority of) the decision-making capabilities over the trust to the trustee.
How are Discretionary Trusts Beneficial?
One of the greatest benefits that a discretionary trust can provide for its settlor is that it prevents the beneficiaries from being able to abuse the trust funds by collecting them too soon.
For instance, if the beneficiary is a young minor or has a history of overspending, the trust funds can be set up in such a way that they get distributed in accordance with the judgment of the trustee.
This is because the trustee can be given the capability to evaluate whether or not the beneficiary would be mature enough (or of legal age) to receive the money or property, and if they could use it responsibly.
In addition, a discretionary trust helps to relieve the estate holder of the various tasks and decisions that need to be made concerning the trust. By having a trustee step in to take over this significant role, it allows the estate holder to ease off and concentrate on other matters. This can also be useful in a scenario where the estate holder becomes incapacitated and thus can no longer make legal decisions on their own.
Finally, discretionary trusts are often desirable due to their flexibility. Rather than being controlled by specific instructions, a trustee has the ability to adapt to different circumstances that may arise, and can even make decisions in anticipation of foreseeable changes.
How are Disputes Over Discretionary Trusts Handled?
While there are many benefits to setting-up a discretionary trust, they can sometimes lead to a trust dispute. One of the main issues that arises during a dispute involving a discretionary trust is when a trustee has failed to carry out their legal trust duties or has abused their authority over the trust in some manner.
For instance, if a trustee illegally withholds the distribution property from a rightful beneficiary, then they might have to pay damages to that beneficiary for their unlawful actions.
Generally speaking, discretionary trust disputes are typically handled by filing a civil lawsuit with the court. Much of the litigation will usually focus on the trust document itself.
In other words, courts will prefer to look to the written trust instrument before examining the oral testimony of any one witness. This is why it is so important for a discretionary trust document to be written clearly and to be reviewed by an attorney if possible.
Lastly, disputes over discretionary trusts can result in a damages award. In some cases, the dispute may also call for criminal consequences. This scenario might come up in a case where malicious or intentional violations of the trust have occurred.
Do I Need to Hire a Lawyer for Help with a Discretionary Trust?
As discussed above, discretionary trusts are one of the more common types of trusts that people tend to create. Although they can provide many advantages to the different parties associated with the trust, it is absolutely necessary that the discretionary trust is drafted carefully and reviewed for legal enforceability before finalizing it.
Additionally, it is also a good idea to be cautious about the person being selected as the loyal trustee since they will be the primary person in control of much of the trust activity.
Therefore, if you have any questions, are considering setting-up a discretionary trust, or are involved in a discretionary trust dispute, then you may want to consider hiring a qualified estate lawyer who is located in your area for further assistance.