Many people set up one or more discretionary trusts as part of their estate plan. What makes a trust discretionary is that the beneficiary of the trust has no control over when and how much of the funds are disbursed to them. That’s done at the discretion of the trustee – often based on the written instructions provided by the grantor (the person who established the trust).
The goal of some discretionary trusts is to protect the assets for those who aren’t old enough or otherwise able to manage them. Many are set up to protect assets from misuse by the beneficiary and from going to a party for whom they’re not intended. A trustee may be responsible both for safeguarding the assets and investing them wisely for the future.
When should you consider a discretionary trust?
Let’s look at some examples of times when a discretionary trust is used:
- When the beneficiary is a minor child
- When a beneficiary is mentally disabled or otherwise unable to handle their own finances
- When an adult child or beneficiary has spending, gambling or addiction issues
The last example is often referred to as a “spendthrift trust.” Another protection a discretionary trust provides these beneficiaries is that, if properly established, creditors aren’t able to come after the money because the beneficiary has no legal ability to access the funds themselves.
Sometimes people set up discretionary trusts because they want their money to remain in the family. A discretionary trust can keep a beneficiary’s funds from having to be split with a spouse in a divorce.
Choosing a trustee
The choice of a trustee for a discretionary trust is crucial. If it’s someone in the family, you need to ensure that they won’t give in to pressure or emotional blackmail. Financial institutions and other third-party entities provide professional trustees. You can also designate an “appointer” who has the authority to replace the trustee or a guardian for the trust who has to approve any distributions authorized by the trustee.
All of this, like estate planning as a whole, requires some serious thought about your wishes and goals for your legacy as well as how well your loved ones are equipped to handle the assets you intend to leave them. Knowing the laws in Pennsylvania that govern estate plans is also crucial.