Legal Definitions - nondiscretionary trust

A nondiscretionary trust is a legal arrangement where the person who creates the trust (known as the "trustor") provides extremely specific and unchangeable instructions regarding how the trust's assets are to be managed and, most importantly, how they are to be distributed to the beneficiaries. In this type of trust, the trustee, who is responsible for overseeing the assets, has absolutely no flexibility or personal judgment in deciding who receives what, when, or under what conditions. While the trustee must still manage the assets wisely to ensure their financial health and growth, their role in distributing funds is strictly to follow the trustor's detailed plan without any deviation.

• Example 1: College Education Fund

  A grandparent establishes a trust for their two grandchildren, specifying that each grandchild will receive exactly $25,000 per year for four years, starting when they enroll in an accredited university, to cover tuition and living expenses. The trust document explicitly states these amounts and conditions. The trustee's job is simply to verify enrollment and disburse the $25,000 annually to each grandchild as instructed, without any ability to increase or decrease the amount, or decide if a grandchild should receive more or less based on their academic performance or financial need.

  This illustrates a nondiscretionary trust because the grandparent (trustor) has precisely dictated the distribution amounts and timing, leaving no room for the trustee to exercise personal judgment or discretion in how the funds are paid out to the beneficiaries.

• Example 2: Structured Inheritance Payout

  A parent creates a trust for their child, instructing that the child is to receive a lump sum of $150,000 on their 25th birthday, another $200,000 on their 30th birthday, and the remaining balance of the trust assets when they turn 35. The trustee is legally bound to make these payments exactly as scheduled, regardless of the child's financial situation at those specific times. The trustee cannot decide to give the child the money earlier, later, or in different amounts.

  This is a nondiscretionary trust because the parent (trustor) has set a rigid schedule and specific amounts for the distribution of assets. The trustee's role is purely administrative, executing the predetermined payouts without any power to alter the terms.

• Example 3: Fixed Charitable Contributions

  A philanthropist sets up a trust to support several local charities. The trust document mandates that $75,000 be donated annually to the local homeless shelter, $30,000 to the community arts council, and $15,000 to the children's hospital for the next five years. The trustee is obligated to make these exact payments to these specific organizations each year, even if one charity experiences a sudden surge in donations or another faces unexpected financial hardship. The trustee cannot reallocate funds between the charities or change the donation amounts.

  This demonstrates a nondiscretionary trust because the philanthropist (trustor) has precisely defined the beneficiaries (charities), the specific amounts, and the frequency of distributions. The trustee has no discretion to adjust these contributions based on changing circumstances or perceived needs.