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Discretionary Trust Explained
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 trustee’s discretion invalidates the trust.
A Little More on Discretionary Trusts
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.
References for Discretionary Trusts
Academic Research on Discretionary Trusts
- ● Reaching the Interest of the Beneficiary of a Spendthrift Trust, Griswold, E. N. (1929). Harvard Law Review, 43(1), 63-98. This article analyses certain situations in which questions of recovering from the interest of the beneficiary of a spendthrift trust has been presented. The paper analyses these situations in different cases for purpose of clarity.
- ● Discretionary trusts for a disabled beneficiary: a solution or a trap for the unwary, Frolik, L. A. (1984). U. Pitt. L. Rev., 46, 335. This author makes reference to one of his former work titled “Estate Planning for Families with Mentally Disabled Children”, where he stated that effective planning for parents of mentally disabled kids required the creation of trusts with granted the trustee certain rights (more details shown in article). The main objective of this paper is to reexamine and correct some conclusions and recommendation of the former article by this author.
- ● Problems of Discretion in Discretionary Trusts, Halbach, E. C. (1961). Columbia Law Review, 61(8), 1425-1457. This paper investigates the shortcomings arising from the use of discretionary trusts that requires careful attention of the draftsman. It also examines different questions which arise as a result of the inability of the terms of trust to cover these shortcomings.
- ● Discretionary Support Trusts, Abravanel, E. G. (1982). Iowa L. Rev., 68, 273. This article analyses instances in which a property owner who wishes to donate an item may establish a trust under the conditions of the receiver or donee.
- ● Spendthrift and Discretionary Trusts: Alive and Well Under the Uniform Trust Code, Newman, A. (2005). Real Property, Probate and Trust Journal, 567-637. This paper examines Article 5 of the Uniform Trust Code. The objective is to show that while much of the criticisms of the Uniform Trust Code are unwarranted, others have led to its successful revisions.
- ● Trust Grantors and Section 674: Adventures in Income Tax Avoidance, Westfall, D. (1960). Columbia Law Review, 60(3), 326-347. This paper examines the role of a lawyer in the creation of inter vivo irrevocable trusts. This paper aims to show the impact of different conclusions drawn from various studies on inter vivo trusts on the general public.
- ● Uniform acts, restatements, and trends in American trust law at century’s end, Halbach Jr, E. C. (2000). Cal. L. Rev., 88, 1877. This article examines Uniform Acts, Restatement and various trends in the American Trust Law. It covers areas such as Trust as Entities, leniency in determining the validity and meaning of instruments among others.
- ● Probate Code Section 15306: Discretionary Trusts as a Financial Solution for the Disabled, Sartain, J. (1989). UCLA L. Rev., 37, 595. This article analyses the various concerns over the financial needs of disabled families, or families with disabled members. It also examines trusts created for these families.
- ● The secret life of the trust: the trust as an instrument of commerce, Langbein, J. H. (1997). Yale Lj, 107, 165. This paper examines the trust as a branch of the Anglo-American law of gratuitous returns.
- ● The Attorney-Client Privilege in the Corporate Arena, Burnham, B. P. (1968). Bus. Law., 24, 901. This article analyses the corporate privilege of the attorney-client in judicial decisions.
- ● Why the Generation-Skipping Transfer Tax Sparked Perpetual Trusts, Fellows, M. L. (2005). Cardozo L. Rev., 27, 2511. This paper explores the Max M. Schaanzenbach and Robert H. Sitkoff’s work on why generation-skipping transfer tax sparked perpetual trust. It also examines some of their previous articles, with emphasis placed on their work titled “Jurisdictional Competition for Trust Funds.”
- ● Accessions Tax Proposal, Tax, Andrews, W. D. (1966). Tax. Tax L. Rev., 22, 589. This article explores Harry Ridwick’s works titled A Proposal for An Accessions Tax and the impact it had on the creation of a draft accession tax as part of the American Law Institute’s Federal Estate and Gift Tax Project.