Discretionary Trust

Definition

Discretionary trust provides a trustee with the power to decide and come to a conclusion with regard to the beneficiary who would receive the funds and the amount of funds that he/she would get. The trust’s settler may look at guiding the trustee using a memorandum that is informal or through a letter comprising wishes. However, any of the settlor’s attempts to put restrictions on the discretion of trustees renders the trust invalid. Given that none of the assets can be clearly identified with any one particular beneficiary, the creditors are not allowed to attach the assets of the trust towards paying a liability or loan.

Thus, Discretionary trust is essentiallyan arrangement wherein property is kept aside with a clause that it can be used for benefiting another as well as the beneficiary and which suggests that the trustee has the right for accumulating, instead of paying the beneficiary, the income that is generated by either a portion of the property or the complete property on an annual basis.

Based on the instrument terms, which helps in creating the trust, such type of income can be gathered for purpose of distributing it in future to the beneficiaries or can be added to the corpus, the trust’s principal or the main body, for remainderman’s benefit, a person who is entitled to the estate’s balance once a specific estate created out of it expires. Such a trust is called the discretionary trust as its trustees possess the discretion to deny or give the beneficiary benefits as per the trust. The beneficiary can under no circumstances force the trustee to utilize any of the property of the trust for his/her advantage.

In such a trust, the beneficiary doesn’t have any interest, which can be reached or transferred by the creditors till the trustee resolves to apply or pay any of the property of the trust for the beneficiary’s benefit. It is during such a time that the creditors of the beneficiary can approach the trust unless it is under the protection of a clause called ‘Spendthrift Trust’.

A discretionary trust can be created by any person for her/his personal benefit. However, the creditors can either reach the maximum limit a trust is allowed for applying or pay the beneficiary as per the terms of the trust, irrespective of whether she or he received the payment actually or not.