The greatest flexibility comes with a discretionary trust

Published By | Jun 27, 2022 | Estate Planning |

There are many different types of trust you can use as you do your estate planning. You may want to choose things that are important to you. For instance, educational trusts are very common, as they set aside money that heirs are only allowed to use for college expenses.

But one problem that comes with trusts is that they can sometimes be inflexible. You can’t necessarily predict, at the time that you write your estate plan, what you would want to financially support in the future.

For example, maybe you set up a trust saying that your heir had to be employed in order to withdraw money from that trust. They were allowed to withdraw as much as they earned every year. You did this because you didn’t want the trust to make them drop out of the workforce, so it incentivizes them to keep working in order to get their inheritance.

But what if things change?

That may sound good as you write the plan, but what if the future isn’t exactly what you expected? Say that your heir comes down with cancer or another sort of serious disease. They can no longer work while they get treatment for the disease. They would like to use the money from the trust to help, but they’re technically not allowed to do so because they don’t have any earnings to report. Is that really what you would have wanted?

A discretionary trust changes things because the trustee can make the decisions in real time. They can look at the situation, consider what they believe you would have wanted, and make the right choice. In the example above, it’s clear that you would probably want your heir to use the money to support themselves or pay for cancer treatment, rather than being cut off. A discretionary trust would make this possible.

At the same time, the money is still in the trust. You can instruct the trustee to generally use it for college tuition or to restrict withdrawals to the same amount as annual earnings, but you can also give them the discretion to change those rules when necessary. This allows you to accomplish your goals without putting your heirs in a hard position.

Creating your plan

You can see that creating an estate plan can get fairly complicated, so make sure you take the time to carefully consider all of your legal options.