Legal Definitions - discretionary trust

A discretionary trust is a type of trust where the trustee (the person or entity managing the trust assets) has complete control over when, how much, and to whom distributions of the trust's income and principal are made to the beneficiaries. Unlike other trusts where beneficiaries might have a guaranteed right to receive payments, in a discretionary trust, the beneficiary only has an expectancy of receiving funds, not an absolute right or a direct ownership interest in the trust assets.

Because the trustee holds all the power to decide on distributions, the trust assets are generally protected from the beneficiary's creditors. The beneficiary also cannot voluntarily transfer or assign their interest in the trust, as they do not technically "own" the assets until the trustee decides to distribute them.

Here are some examples to illustrate how a discretionary trust works:

• Protecting a Beneficiary with Financial Challenges: Imagine a wealthy individual, Mr. Chen, who wants to provide for his adult son, David, but is concerned about David's history of poor financial decisions and accumulating debt. Mr. Chen establishes a discretionary trust for David, naming a professional trust company as the trustee. The trust document grants the trustee full discretion to distribute funds to David only for specific needs like housing, medical expenses, or education, and only when the trustee deems it appropriate. If David asks for a large sum to invest in a risky venture, the trustee can refuse. If David's creditors try to seize assets from the trust to pay his personal debts, they generally cannot, because David has no guaranteed right to the funds; he merely has an expectation that the trustee *might* provide for his needs.

• Supporting a Beneficiary with Special Needs: The Rodriguez family has a daughter, Maria, who has significant disabilities and relies on government benefits like Medicaid and Supplemental Security Income (SSI). To ensure Maria's quality of life is enhanced without jeopardizing her eligibility for these programs (which have strict asset limits), the family creates a discretionary trust. Maria's sister is appointed as the trustee, with the power to use trust funds to pay for things that government benefits do not cover, such as specialized therapies, recreational activities, or assistive technology. The trustee decides what expenses are paid and when. Since Maria does not have a direct right to demand payments or control the trust assets, the funds are not considered her personal property, allowing her to remain eligible for essential government assistance while still receiving supplemental support.

• Providing for Future, Unpredictable Needs: A grandmother, Mrs. Davies, sets up a discretionary trust for her three grandchildren to help them with future needs like higher education, starting a business, or unforeseen medical emergencies. She appoints a trusted family friend as the trustee. The trust specifies that the trustee has complete discretion to distribute funds to any grandchild, but only for these approved purposes and only when the trustee determines it is in the grandchild's best interest. For example, if one grandchild needs funds for college tuition, the trustee can pay the university directly. If another grandchild requests money for a lavish vacation, the trustee can deny the request. This structure ensures the funds are used responsibly and for genuine needs as they arise, rather than being distributed as a lump sum that might be mismanaged, demonstrating the trustee's ultimate control over the distributions.