A discretionary trust protects inherited assets from creditors, predators, and divorcing spouses by placing them under the control of a trustee, not the beneficiary.
These trusts can be customised to your specifications, allowing the trustee to provide funds to your chosen loved ones for specific expenses, such as education or health care.
Discretionary trusts can also help reduce estate taxes through generation-skipping planning and ensure your assets pass to your chosen beneficiaries.
Leaving your hard-earned assets outright to your children, grandchildren, or other loved ones after you die may seem like the simplest way to pass on your legacy. However, this approach can expose those assets to unnecessary risks from creditors, lawsuits, financial predators, and divorcing spouses.
To provide greater protection and long-term security, consider placing assets in a discretionary trust. This estate planning tool lets your trustee manage and distribute funds according to your intentions while shielding your beneficiaries from potential threats.
You may want to designate certain loved ones as beneficiaries of a discretionary trust in your estate plan.
Why Choose a Discretionary Trust?
A discretionary trust protects inherited assets by placing them under a trustee’s control instead of the beneficiary’s. This helps block creditors, predators, and divorcing spouses from accessing the assets.
Trustees can provide funds for specific expenses, such as education or health care, tailored to your wishes.
These trusts also reduce estate taxes through generation-skipping planning. They ensure your assets pass to the beneficiaries you choose.
What Is a Discretionary Trust?
With many frivolous lawsuits and high divorce rates today, you want to protect your money and property so loved ones benefit for years after you’re gone. Discretionary lifetime trusts serve as a useful estate planning tool for beneficiaries of any age.
A discretionary trust is a type of trust you create to protect your assets if you worry about beneficiaries’ money management, spending habits, judgement, creditors, or divorcing spouses.
This trust places control over inheritance with the trustee. The trustee decides when and how beneficiaries receive funds. Because beneficiaries lack automatic rights to trust assets, those assets stay protected from creditors, lawsuits, and divorces.
Irrevocable Nature and Funding
This trust is irrevocable; you cannot change it once created. You fund it by transferring assets during your life or after your death.
The trust legally owns the assets, not your loved ones. You appoint a trustee—an individual, professional, or institution—to manage and distribute assets based on your wishes.
Discretion and Flexibility
The “discretionary” feature means you decide under what conditions the trustee distributes funds. For example, trustees might pay for education, healthcare, weddings, homes, or business startups.
By working with an experienced estate planning attorney, funding the trust with prudently invested assets, and choosing a reliable trustee, you can ensure the trust supports beneficiaries throughout their lives.
You can set broad or specific terms. For instance, the trustee might distribute funds only for healthcare after the beneficiary turns 21 or for healthcare and education at any age.
The trust’s goal is to protect your loved ones’ inheritance from risks such as poor money skills, troubled marriages, high-risk professions, lawsuits, or debts. Instead of paying creditors, trust assets remain secure under trustee control.
You can add discretionary provisions to other trust types depending on your planning goals.
Fund your discretionary trust either while alive or posthumously. After your death, your assets transfer to the trust for your beneficiaries’ benefit.
How Does a Discretionary Lifetime Trust Protect an Inheritance?
A discretionary lifetime trust creates a protective “box” around each beneficiary’s inheritance. This keeps their inheritance separate from their personal assets and control, protecting it from lawsuits and divorcing spouses.
Only the trustee, following your instructions, can access the funds for the beneficiary’s benefit. Creditors, predators, and divorcing spouses usually cannot seize these assets.
When a beneficiary dies, you decide who inherits the remaining assets. You might create a series of discretionary trusts that cascade through generations, protecting your family’s wealth for decades.
Estate Tax Benefits of Discretionary Trusts
Discretionary trusts can help minimise estate taxes through generation-skipping planning. This passes assets from your children to your grandchildren, keeping wealth in the family.
You control who inherits any remaining assets in each beneficiary’s trust. This ensures your family retains the assets over time.
Although distribution options vary within legal limits, a well-drafted discretionary trust protects assets from creditors and divorce, reduces estate taxes, and ensures assets reach your chosen beneficiaries.
Work With an Estate Planning Attorney
If you worry your family lacks the skills to manage or protect an inheritance, consult an experienced estate planning attorney. They can help you set up discretionary trusts tailored to your goals.
Remember, estate planning also involves important documents such as wills, durable powers of attorney, and living wills.
For more information on discretionary trusts, contact our office to schedule an appointment with one of our estate planning attorneys.