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What is a Discretionary Trust?

It is a type of trust that is set up for providing benefits to one or more beneficiaries. The trustee who decides when and what funds are distributed to the beneficiaries. The beneficiaries do not have any right to decide when to withdraw the funds from the trust. This fund is not a part of the beneficiary's assets or estate. The settlor (creator) of the trust may leave a letter of intent to guide the trustee about the disbursement of the fund; but, this letter is not legally binding. Any attempt to alter the trustees discretion invalidates the trust.

How Does a Discretionary Trust Work?

In most trusts, the beneficiaries are paid either monthly or the corpus of the trust is distributed after a certain time. In any event, the terms of asset distribution are predetermined. In a discretionary trust, in contrast, there's no predetermined time or conditions. The trustee decides the payment terms and the beneficiary cannot claim the money at any stage. The trustee has the absolute control over the fund, but they cannot benefit from it. The trustee may disregard the wishes of the settlor. To prevent this from happening, some discretionary trusts may have appointer. The appointer is empowered to remove a trustee and appoint someone else. Discretionary trusts are common in England, Canada, and Australia. In Australia/New Zealand it is also called the family trust. A discretionary trust may have two aspects. The trustees may have the power to choose the beneficiary from within a specified group. The trustees will decide the amount to be paid to the beneficiaries. Most of the discretionary trusts provides both of these rights to the trustee; but some of the trusts may withdraw one of these powers. In those cases, the trustee gets to select the beneficiary from the predetermined group of people, but the amount to be paid is fixed. A discretionary trust may also give the power to the trustee to add or remove beneficiaries from the group at his or her discretion. It provides flexibility in changing circumstances.

Related Topics

• Succession Planning
• Chartered Trust and Estate Planner
• Conservatorship
• Probate
• Cy Pres Doctrine
• Exordium Clause
• Non-Contestability (No Contest) Clause
• Bequest
• Per Stirpes
• Ademption
• Abeyance
• Elective Share
• Escheat
• Qualified Domestic Relations Order (QDRO) 
  
• Declaration of Trust
• Uniform Gifts for Minors Act
• Acceptance of Office by Trustee
• Beneficial Interest
• Asset Protection Trust
• Bare Trust
• Blind Trust
• Charitable Lead Trust
• Charitable Remainder Trust
• Charitable Remainder Annuity Trust
• Charitable Gift Annuity
• Credit Shelter Trust
• Discretionary Trust
• Generation Skipping Trust
• Grantor Trust Rules
• Living Trust
• Inter Vivos Trust
• Revocable Trust
• Irrevocable Trust
• Irrevocable Income-Only Trust
• Qualified Domestic Trust (QDOT)
• Qualified Terminal Interest Protection Trust (QTIP)
• ABLE Account
• Accumulated Income Payments (Canada)
• Charitable Split-Dollar Insurance Plan
• Coverdell Education Savings Account