What Are Discretionary Trusts?

The number of different kinds of trusts available to someone who wants to protect their assets for their family can be somewhat daunting if you happen to bring up a list of them on Wikipedia or another such site. Although in many cases one type of trust is effectively almost identical to another but with subtle changes, the important line to take is that there are certain types of trust that are used with great regularity and others that are used only in irregular situations. Among these, Discretionary Trusts fall - just about - into the former category. Put simply, a discretionary trust allows the testator to set out criteria for the beneficiaries rather than naming specific beneficiaries. Although this may sound like a very roundabout way of doing things, there are very good and valid reasons why someone might decide to have a discretionary trust in place.

Reason one - for the sake of differentiating - would be if, hypothetically, the testator has a son who is a reckless spender. With the credit cards, personal loans and overdraft exhausted, the real danger for the son would be that come the time of their inheritance, the money would be subject to an attachment in case of bankruptcy. By holding this money in trust the beneficiary (or the son) would be able to get their affairs in order and then have access to the money, rather than having it instantly taken by the creditors in a bankruptcy case. This allows the testator to bestow money as a gift to their child without having to feel that it will just go directly to the courts.

Reason two is another which may arise in the case of a beneficiary in possession of a serious spending habit or, potentially, someone who is considered too young to be in a position of extreme (or comparatively extreme) wealth. Rather than have to choose - definitively or repetitively - to remove and/or reinstate their beneficiary's status, the testator can decide to include the beneficiary in the will without naming them. From a cynical point of view this allows the testator to retain a level of control over a child who may well take their promised inheritance as a green light to behave with excessive irresponsibility. By requiring a demonstration of competency, the testator can ensure that their beneficiary earns the right to an inheritance rather than expecting it as a privilege.

As well as these examples, a discretionary trust will allow the testator to have some flexibility in case of changes in circumstances. Should, for example, a new child be born in the time between the creation of a trust and its payout, the discretions laid down may allow this child some access to part of the assets at an agreed point. As well as this, there is the case of divorce settlements. If an individual named in a trust or will goes through a divorce, it is possible that their spouse will have access to their assets. By holding the assets in a discretionary trust, there is no opportunity for the spouse to lay claim to them.

Disclaimer: This article is for informational and entertainment purposes only, and should not be construed as legal advice on any subject matter.

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