Although your daughter is on a great path, you worry about what might happen if she relapses again in the future when you are no longer around. Your desire is to leave her your estate, but you are worried that she would have access to large sums of money in the case of a relapse scenario. It keeps you up at night worried that she could possibly squander her inheritance for the purpose of drugs and alcohol. You decide to set up a Discretionary Trust with your daughter’s godfather as the Trustee.
Does that mean principal can be invaded for their benefit, even if it results in the trust assets being exhausted? It is not uncommon for primary beneficiaries to believe they should get increased distributions but remainder beneficiaries to think that the trustee should keep the principal intact for the benefit of remainder beneficiaries. Addressing this in the trust instrument creates a clear statement of intent by the settlor. When we set up a trust in Nevis, the first decision is how the structure should actually function.
The trust sets out who receives income or capital, in what proportions, and often when those entitlements arise. Long-term dynasty trusts for multiple generations use discretionary standards because no one can predict the circumstances of beneficiaries decades in the future. The trustee needs flexibility to adapt distributions to changing family situations and economic conditions. Compare this to a mandatory income trust, where the trust document requires the trustee to distribute all net income to the beneficiary every year — the beneficiary has a legal right to that income and can sue to enforce it. The mandatory trust offers certainty; the discretionary trust offers flexibility and protection. This person will manage the trust and ensure that the assets are distributed according to your wishes.
- If they receive any distributions that were made from the Trust’s principal, they do not have to pay any taxes.
- Founded in 2003 by Grey’s Inn graduate Barclay Littlewood, the Company was built on a commitment to excellence, with unique guarantees and a high standard of service from day one.
- This should be someone, or an entity, that you can trust to act in good faith.
- A financial advisor might need to share details about a client’s investments with their family in case of a serious medical emergency or incapacity.
- Many individuals like to consider their closest friends and family members as possible Trustees.
Key Features Of A Discretionary Trust
Or maybe you have a grandchild with special needs, and a direct inheritance could disqualify them from essential government benefits. How can you provide for them without risking the very funds meant to protect them? Think of a discretionary trust as creating a personalized, private family bank, managed by a trusted “banker” (the trustee) you appoint.
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For example, a trust may provide that all income is paid to a surviving spouse for life, with the capital passing equally to the children upon the spouse’s death. The trustee manages the assets and ensures distributions are made in line with those terms, but cannot redirect income or change the allocation between beneficiaries based on changing circumstances. Many parents create discretionary trusts for adult children who struggle with substance abuse, poor financial decisions, or difficult creditor situations. The trustee can respond to the beneficiary’s actual circumstances rather than making automatic payments that might fuel destructive behavior. Special needs trusts for disabled beneficiaries are structured as discretionary trusts to preserve government benefit eligibility. The trustee supplements (rather than replaces) government benefits by making discretionary distributions for items not covered by Medicaid or SSI.
Sometimes giving money or assets outright to a beneficiary – such as a child, a grandchild, or a special need loved one – is not ideal for distributing your wealth in an estate plan. However, an express power to appropriate may be found in less direct words. When delegation of power is considered, two different matters are taken into account. The first one is whether and to what extent an individual trustee may delegate his powers to a third party to exercise on his behalf. The second is whether the trustees as a body may delegate to one or some of their number or to a third party the exercise of their powers and the discharge of their duties as trustees.