discretionary trust

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Discretionary trusts are a type of irrevocable trust where the trustee has complete discretion on when and what amounts of assets to distribute to the beneficiaries. The beneficiaries have no right to distributions from the trust. The trustee typically has no limits on discretion besides those imposed by fiduciary duties. This structure prevents creditors from acquiring assets from the trust because the beneficiaries technically have no rights to distributions.

In creating a discretionary trust, one must be careful to follow the federal and state law and regulations that may apply to ensure the trust creates the desired outcome. For example, authorities differ on how much discretion must be given to the trustee to be treated as a discretionary trust. Often, even including the phrase “shall” into the language on the discretion of the trustee will be treated as requiring the trustee to make at least some distributions and therefore be considered as a different kind of trust. 

Also, a discretionary trust must be cautiously made as the trustee retains such high levels of discretion that they may go against the intentions of the grantor. A grantor may set some limitations on the discretion of the trustee, such as requiring the trustee not to make distributions that would make a beneficiary ineligible for government benefits. However, most limitations will be treated as creating a trust that is not discretionary. Thus, the grantor has very limited options in controlling a trustee once the discretionary trust is created. 

[Last updated in March of 2023 by the Wex Definitions Team]