Connect with us

Discretionary Trust

« Back to Glossary Index

What Is A Discretionary Trust?

A discretionary trust provides a platform for an individual’s estate funds to be disbursed to beneficiaries by an appointed trustee whenever they consider the timing appropriate.

A discretionary trust empowers the trustee to manage the individual’s estate in their absence and decide- at their discretion- how, when to, and whom to distribute it.

The beneficiaries reserve no rights to the funds, and the funds are not regarded as part of the beneficiaries’ estates.

It can be set up when drafting and structuring a will and is a sure way to secure generational wealth by transferring assets to (grand)children.

Deeper Definition

Discretionary trusts are set up such that, depending on the terms of the trust, beneficiaries will be allocated a particular portion of the trust income and may either receive payments monthly or as a lump sum when they attain certain ages.

An individual or a couple usually sets up a discretionary trust. In doing so, they appoint two(2) or more trustees to manage the assets for the intended number of beneficiaries.

They are allowed to either do so during their lifetime or write it as part of their will, hoping that their wishes will be respected when they are dead.

They can also prepare a ‘letter of Wishes’ along with the will, which details advice and requirements for the beneficiaries to receive the assets. However, the letter is not a legal document, and trustees are not legally obligated to follow through with its contents. 

It sometimes helps individuals who are undecided about distributing their wealth among beneficiaries after death by passing on the responsibility to others and is protected from creditors if bankruptcy or liquidation occurs.

The trustees are considered the legal owner of the funds and distribute them according to how they consider it wise, especially when the beneficiaries are immature, physically challenged, mentally impaired, addicts, spendthrifts, indebted, bankrupt, or altogether irresponsible.

Grantors also install ‘appointers’ -who have the power to remove the trustee and appoint new ones in cases of perceived inappropriate action- or ‘guardians’ who ratify distribution decisions.

Discretionary Trust Example

If a mother who has a terminal disease wants her infants to get her assets when they come of age after her demise, she can appoint a trusted friend as a trustee. 

« Back to Glossary Index

Get the news right in your inbox