Discretionary Trusts – How to Protect Your Beneficiaries From Bad Decisions and Outside Influences

Merely leaving assets to your children, grandchildren or any other beneficiaries can be dangerous for them. Outside influences like creditors, predators and divorcing spouses can come in and take some or all of the inheritance left. Using discretionary trusts for your beneficiaries’ benefit is best to protect them.

What is a Discretionary Trust?

A discretionary trust is an irrevocable trust that protects the assets put into it, benefitting the beneficiary. It can protect against a divorcing spouse, personal or professional creditors, extravagant spending and poor money management. The terms of a discretionary trust limit the amount distributed and when can be distributed. These limitations can be made very specific or broad, whatever you desire. It could be set up that the funds are to be distributed only for healthcare and education after a certain age. You can decide the specifics.

Discretionary trusts can be designed to minimize estate taxes because the trust assets pass down from your children to your grandchildren. This is called generations skipping planning. You have the freedom to designate who inherits the remaining assets once the original beneficiary dies. This will keep the trust assets in your family.

Distribution choices are nearly endless with discretionary trusts. There are some laws regarding bankruptcy and creditor protection that can come into effect. If a discretionary trust is correctly drafted, the beneficiary’s inheritance will be protected from creditors, predators, divorcing spouses and estate taxes. It can then pass to whomever you choose.

Where Should You Include Discretionary Trusts in Your Estate Plan?

Discretionary trusts need to be added to all your trusts. It should be included in your Revocable Living Trust, Irrevocable Life Insurance Trust, and Standalone Retirement Trust.

What Should You Do?

If it of concern that your beneficiaries may not manage and invest their inheritance wisely or that a lawsuit or divorce could take the assets, then you need to talk to an estate planning attorney about adding discretionary trusts to your estate plan.


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