Discretionary Trust Provisions: What You Need to Know

Discretionary Trust Provisions: What You Need to Know

A trust is only as powerful as the terms inside, and this is why careful attention to detail is a must when selecting an experienced estate planning attorney to help you with the structure of your trust.

Given the inflexibility of many mandatory trusts, a discretionary trust empowers the trustee to use his or her discretion when paying out principal or income to beneficiaries. This is an important role played by a trustee who is mindful of the best interests of those receiving assets and can also enhance confidence for the trust creator when spendthrift beneficiaries are involved.

A pure discretionary trust provides that a trustee can only distribute principal and income in line with his or her individual discretion about what’s appropriate. This means that, without additional guidelines, the trustee cannot be compelled to make a distribution that the trustee doesn’t see fit to uphold. A true discretionary trust, therefore, may include claims that the trustee has “unfettered and complete” discretion about making or withholding distributions.

Trust Purpose Provisions

There are many different reasons why a grantor may establish a discretionary trust, including for tax planning purposes, to protect assets from beneficiaries who may not manage it effectively outright, to accommodate for parent deficiency, to exercise control, or to clearly and orderly transfer property to others.

The trust should be drafted with the varying reasons behind the grantor’s choice presented. A trust created for tax planning purposes, as one example, should be draft with reference to the Internal Revenue Code standards.

This can help to reinforce intent and increase the strength of the trust and all its provisions.

Specific Intention Provisions with Reference to a Class

In general, courts are hesitant to compel a trustee to enforce sections of a trust if it applies to one specific beneficiary. A grantor who wishes to ensure that one child, for example, finishes a four-year college education might benefit from a careful review of this provisionary wording. While minor in nature, it may be better to state that an entire class of beneficiaries is affected by the same provision.

Consider the following distinction:

• Trust provision as outlined by client: The trustee shall make no distributions to my daughter unless she completes a bachelor’s degree.
• Trust provision revised: The trustee can distribute income to all of my children who complete a bachelor’s degree.

Within this provision, the intent is the same, but it is written in a manner that clearly gives the discretion and ability to act to the trustee.

Provisions Regarding Clarity of Fiduciary Decisions vs. Formulas

Some trusts require distribution based on a specific formula, meaning that the trustee doesn’t have full discretion. In these cases, it’s very important the trust provisions outline exact definitions for key terms. For example, a cost of living adjustment provision should explain how the cost of living is to be calculated and when to give the trustee better understanding of how to approach this.

Provisions Related to Standard of Living

One of the most common provisions inside a discretionary trust has to do with standard of living. Most grantors will establish a trust and empower a trustee to make decisions for the beneficiary such that the recipient can enjoy a similar standard of living provided while the grantor was still alive.

This provision should highlight that it falls to the trustee to investigate the beneficiary’s standard of living. The trust may directly reference the factors to be considered, including size and type of dwellings, price of cars, membership in any recreational facilities, the expense and style of educational institutions attended, and whether or not domestic help was employed by the recipient.

Final Thoughts on Discretionary Trusts

Although discretion is the primary feature of this trust, careful consideration of provisions can help to give a grantor peace of mind and to empower a trustee to act accordingly when the time comes. Working with an experienced estate planning lawyer is essential for drafting a clear and meaningful trust.

Take some time to schedule a free 30-minute consultation today and let us provide you with the tools you need to reach your estate planning goals.

This article is provided as a public service by the the Law Offices of C. David Martinez, PLLC. While the information on this site is about legal issues, it is not legal advice or legal representation. Because of the rapidly changing nature of the law and our reliance upon outside sources, we make no warranty or guarantee of the accuracy or reliability of information contained herein.