You’d like to leave your assets to your children and other beneficiaries after you’re gone, and you’re inclined to choose the simplest and easiest form of distribution. Unfortunately, without some built-in protections, a simple distribution can make your inheritance vulnerable to creditors, predators, ex-partners, or divorcing spouses, as well as a second estate tax upon the death of your beneficiary.
A discretionary trust for each beneficiary can keep your assets safer as they change hands.
A discretionary trust: What is it, and what are the benefits?
A discretionary trust is an irrevocable trust set up to protect assets from poor decisions or unanticipated actions, including those that can result from the beneficiary’s poor money-management skills. If your beneficiary isn’t careful with money, or the funds may be exposed to creditors, judgments, or divorcing partners, this type of trust can limit the potential depletion or exploitation that might result.
Under the terms of a discretionary trust, limits are placed on the amount of assets that can be distributed to the beneficiary and when these distributions can be made. If you’re the one setting up the trust, these limits, terms, and time frames can be designed to accommodate your wishes.
For example, you may want to provide distributions only for the beneficiary’s health care needs or only after they reach a certain age. You can provide specific distributions of income or principal at any age, and if you choose, you can stipulate that these funds support only healthcare needs or educational expenses.
An additional benefit
Adding discretionary trusts into your estate plan can also reduce estate taxes, which are drawn from the trust as it changes hands. In what’s known as “generation-skipping,” an inheritance can move from your children directly to your grandchildren, and with a discretionary trust in place, the estate taxes involved in this process can be kept to a minimum.
You can also use this type of trust to dictate who will inherit what is left after a given beneficiary dies; this can help you keep assets in the family over the long term. Within the bounds of bankruptcy and creditor protection laws, the options you can apply to your discretionary trust are almost limitless.
How do discretionary trusts fit into your overall estate plan?
You may be creating multiple trusts to control distributions to your heirs, and discretionary trusts can be included in every one of these. Consider adding discretionary terms to:
- Your Revocable Living Trust
- Your Irrevocable Life Insurance Trust
- Your Retirement Plan Trust
You’re not alone if you’re concerned that your beneficiaries (often children or grandchildren) don’t have the skills they need to manage, protect, or invest their inheritance. This is a common issue, and no matter your questions, our team can provide the answers you need. If you’re concerned about the impact of mismanagement, lawsuits, divorces, or anything else, contact our office, and we can help you incorporate discretionary trusts into your estate plan.