- January 22, 2024
- Kelvin Birk
- Estate Planning
Sometimes giving money or assets outright to a beneficiary – such as a child, a grandchild, or a special need loved one – is not ideal for distributing your wealth in an estate plan.
When setting up a trust, using a discretionary trust provides peace of mind because of the protections this type of trust provides to your loved ones who may not have the skills required to safeguard the assets you give to them.
So, what is a discretionary trust? A discretionary trust, also referred to as a discretionary support trust, is a type of trust set up for the benefit of one or more beneficiaries where the trustee has discretion over how to distribute the trust assets among the beneficiaries. The trustee may also have discretion over when to distribute the assets.
This means that the beneficiaries do not have a set right to receive any particular asset or amount of money from the trust. Rather, they must rely on the trustee’s discretion.
The trustee of a discretionary trust is given full authority to decide when money or assets are given to which beneficiaries. Allowing a trustee to have this kind of discretion can be a good way to safely distribute income to beneficiaries in the form of principal or interest.
Since the beneficiaries of a discretionary trust have no rights to its funds until they are distributed, these funds may not be considered part of the beneficiaries’ estates depending on the specifics of the trust.
What Are the Advantages of a Discretionary Trust?
One of the advantages of a discretionary trust is the protection it provides to beneficiaries.
A Missouri discretionary trust can protect and benefit several types of individuals aside from minors and those with special needs. A discretionary trust helps protect your beneficiaries in several ways including:
- Those with poor money-management skills
- People with drug or alcohol abuse problems
- Estate taxes
- Adding age restrictions for distribution
- Guarding against extravagant spending
- Loved ones who need or may need governmental assistance
- Creditor judgments
- A divorcing spouse
- Income for education only
- Protection against undue influence or predators.
Within a discretionary trust, you can provide specific guidance to the appointed trustee regarding when distributions may be made. You can choose distributions to be used for particular uses.
This can include health, education, maintenance, and support (HEMS). Similarly, a trustee can be directed to distribute funds upon a beneficiary’s completion of certain milestones such as college graduation or completion of rehabilitation.
Discretionary trusts offer protection against creditors since the only way the assets become subject to a creditor is once the funds are distributed to the beneficiary.
If the distributions to a beneficiary are subject to a trustee’s discretion, a beneficiary does not have an interest in that money until it is distributed. Likewise, this protects the money in the trust from creditors since a creditor or other claimant cannot attach a right to present or future money that has not been distributed to the beneficiary.
Moreover, Missouri estate law prevents a creditor from forcing a trustee to make a distribution to the beneficiary or attaching an interest to the money in the discretionary trust with a judgment or other means.
As long as the assets stay in the trust as part of a spendthrift, and the trustee is not required to distribute them to the beneficiary, they will remain safe.
Simply put, discretionary trusts are a good estate planning tool for those beneficiaries who may need extra assistance managing large sums of money.
What Are the Disadvantages of a Discretionary Trust?
Before you make a decision about your estate planning, it’s important to know about the disadvantages of a discretionary trust. A discretionary trust can be a valuable way to distribute structured wealth to beneficiaries, but they are not without drawbacks. One of the main disadvantages of a discretionary trust is the lack of transparency between the trustee and the beneficiary.
The trustee has a great deal of discretion over how the trust funds are used, and there is no requirement for a beneficiary to be notified of all the trust decisions. This can lead to suspicion and resentment especially among multiple beneficiaries if they feel that they are being kept in the dark about trust affairs or one beneficiary is being favored over another.
Another disadvantage of discretionary trusts is that a trustee must carefully balance the wishes of the settlor (creator of the trust) and the needs of the beneficiary when making decisions about trust assets. As a result, discretionary trusts can be time-consuming and expensive to maintain if disputes arise between a trustee and a beneficiary. Furthermore, a trustee who is not acting in the best interests of the beneficiary could be committing trust fraud or otherwise abusing their position.
How Do I Set Up a Discretionary Trust in Missouri?
Since we’ve discussed what is the purpose of a discretionary trust, there are a few things you’ll need to do to set up a discretionary trust in Missouri. First, you’ll need to transfer property and appoint a trustee.
This person will manage the trust and ensure that the assets are distributed according to your wishes. The trustee should be someone whom you trust to make wise decisions about who should receive money from the trust and how much they should receive.
You’ll also need to decide how you want the assets to be distributed. It’s important that you clearly state your wishes in the trust to avoid litigation.
Finally, you’ll need to fund the trust by transferring ownership of the assets into it. Once everything is in place, the discretionary trust will be ready to operate.
Can I Add a Discretionary Trust to My Estate Plan?
A discretionary trust can be part of a standalone trust, but commonly, a discretionary trust is created from within other trusts including revocable trusts and irrevocable life insurance trusts.
Trusts are very flexible estate planning tools, and different types of trusts can be created within one original trust document.
Do I Need a Discretionary Trust Attorney?
Wealth Protection with Peace of Mind – Call the Birk Law Firm
Discretionary trusts are set up to protect the assets placed into the trust for the benefit of the trust’s beneficiary.
Since opening our doors in 1999, our clients have become our greatest asset. We invite you to experience the same professional results our firm gives to every client.
There are certain requirements regarding discretionary trusts and their formation, so it’s good to consult an experienced estate attorney to find out how a discretionary trust can benefit you and your family.
If you have questions about discretionary trusts or any other estate planning tools, call the Birk Law Firm at 573-332-8585 to learn about your options.
Attorney Kelvin Birk
Kelvin Birk is a lawyer as well as a certified public accountant, with more than 30 years of experience in accounting and tax and business consulting, and more than 20 years of experience in numerous legal matters. This combined expertise allows our law firm to provide a level of service above that of other firms. Whatever your legal situation, your attorney at Birk Law Firm can counsel you as to the tax implications. We have experience in providing myriad legal representation services to residents of southeast Missouri and other areas.. [ Attorney Bio ]