What is a discretionary trust?
In a discretionary trust, the trustee has complete discretion over how, when, and whether to make distributions to beneficiaries. In other words, the beneficiaries of a discretionary trust have no power to force the trustee to make a distribution, no matter how much that beneficiary might need the money. And because the beneficiaries have no right to receive the money in the trust, the creditors of the beneficiaries also have no right to the money.
What is the advantage of using a discretionary trust?
The big advantage of discretionary trusts is that they provide a high degree of asset protection for beneficiaries. Because the beneficiaries cannot demand the assets in the trust, the creditors of the beneficiary generally cannot demand the assets in the trust either. By statute, creditors cannot force any distributions from a discretionary trust.[1] However, Florida’s Second District Court of Appeal has allowed child support payments to be forced out of a discretionary trust as a “last resort”.[2] Thus, discretionary trusts provide high degree of asset protection, but the protection is not unlimited.
What is the disadvantage of using a discretionary trust?
The disadvantage is that the beneficiary cannot force a distribution, even if the beneficiary truly needs the money. The trustee is the one who gets to make the call, not the beneficiary. This can lead to conflict if the beneficiary wants the money, perhaps to pay off a debt, but the trustee refuses to distribute the money when a creditor would just end up with it. This can be frustrating for beneficiaries, even if it does protect the assets.
When would you use a discretionary trust?
Discretionary trusts are often used when the beneficiary is likely to have present or future creditors. The trusts are also used when the grantor is worried about the beneficiary potentially getting divorced one day. Keeping the assets in a discretionary trust can protect the assets from the creditors and from ex-spouses who are looking for their share of the divorce estate.
However, discretionary trusts are not to be used in special needs trusts. In fact, using a discretionary distribution standard in a special needs trust would result in nullifying the entire purpose of the trust: protecting the government benefits of the beneficiary.
Is a discretionary trust revocable or irrevocable?
A discretionary trust can be either revocable or irrevocable. Whether a trust is discretionary is determined by how much discretion the trustee has. But whether a trust is revocable or irrevocable is determined by whether the settlor of the trust can undo the trust altogether. Whether a trust is discretionary has no bearing on whether the trust is revocable.
Can a trustee also be a beneficiary of a discretionary trust?
No, the trustee should not also be a beneficiary of a discretionary trust. This would result in the beneficiary losing all the asset protection benefits of the trust. This is because the beneficiary now can force a distribution by using the trustee powers. To keep the asset protection, the beneficiary must not be able to force a distribution.
How do I create a discretionary trust?
To create a discretionary trust, you should speak with a trust attorney. The attorney will help you determine whether a discretionary trust is a good fit for your needs.
Footnotes
[1] Berlinger v. Casselberry, 133 So.3d 961 (2013).
[2] Fla. Stat. 736.0504.