Description
A Discretionary Trust
Overview a discretionary trust is set up for the benefit of a beneficiary or beneficiaries, but for which the Trustee is given full discretion. The Trustee decides when and how much funds are distributed to the beneficiaries. In turn, the beneficiaries have no rights to the funds held in the Trusts. Further, the funds held in the Trust are excluded from the beneficiaries’ estates.
In most cases, Trusts are set up with specific terms that instruct the Trustee to distribute funds to beneficiaries on a set schedule. The terms also usually set how much should be distributed. Discretionary Trusts are unique from other types of trusts because there are no such terms. It is up to the Trustee to decide if beneficiaries should receive any distributions, how much, and when.
These Trusts are most useful when the Trustor feels that it is in the best interest of the beneficiaries. For instance, the beneficiary of a Discretionary Trust may have displayed continued irresponsible behaviour, is disabled, mentally impaired, has a gambling problem, or has a great deal of debt. The Trustee can help protect the beneficiary from themself, as well as the assets from creditors. It is under the Trustee’s discretion to determine when it is appropriate to provide funds to the beneficiary, and how much.
Beneficiaries of a Discretionary Trust do not have any legal claims over the Trust funds. The Trustee has complete control and is considered the legal owner, although they cannot benefit from the funds in any way.
Advantages Discretionary Trusts are associated with many advantages. In the examples above, you learned about a couple of specific advantages, such as protecting a child from themselves if they suffer from mental health issues or addiction. Alternatively, a Discretionary Trust can be used to benefit a child with a disability in such a way that does not disqualify them from government support.
Most Trustors create a Trust because they want to assert some type of control over their funds, even after they have passed away. Discretionary Trusts are different because there are no terms set, and ultimate discretion is given to the Trustee. This doesn’t mean that you can’t provide guidelines, however. For instance, you could set the guideline that you want the funds to help with your child’s education. The Trustee would then make their own decisions on how the funds should support the child in any educational endeavours.
Avoid difficult Decisions Making decisions about how to distribute funds amongst your loved ones isn’t easy. If you want to avoid making these decisions altogether, you can. A Discretionary Trust allows you to step away from decision-making about which property should go to which child, and so on and so forth. This can save you a lot of time and effort if you have a sizable estate.
