Many people are aware that a will is not a sufficient tool for ensuring that your assets are distributed in a way that is conducive to your desires. First, wills are subjected to the probate process, which, depending on the size of the estate, can be lengthy and costly. Then, the inheritances you give are subject to substantial estate tax. Last, if your beneficiaries have creditors, then the creditors can reduce the inheritance by collecting on existing debt. Therefore, to protect your heirs and their inheritance, it is better to create a trust, and in some cases, a discretionary trust is best.
What is a Discretionary Trust?
A discretionary trust is controlled by a trustee and is set up for one or more beneficiaries. The distribution of the funds is at the full discretion of the trustee, and the recipients have no claim to the funds. Also, the trustee cannot benefit from the trust and may be removed by a board of appointees if they are found to be unfit.
Why Use This Form of Trust?
While any form of a trust is likely better than a will alone, a discretionary trust carries several distinct advantages. There are at least four benefits of a discretionary trust.
- Legally Protected from Creditors
As a discretionary trust is not owned by any of the beneficiaries, it cannot be regarded as part of their estate. Therefore, creditors of those who benefit from the fund cannot seek payment through the trust. Therefore, beneficiaries are protected from creditors seeking a piece of their inheritance.
- Reduced Taxes
A significant advantage of trust fund benefits is that estate taxes are reduced. Through a trust, beneficiaries are provided a 50% capital gains tax exemption.
- Estate Planning
For those going through the estate planning process, a discretionary trust limits your headache. It might be challenging to decide on how your assets are distributed after you die, but through a discretionary trust, you do not need to make those decisions. The distribution of funds will be handled by the trustee after your death, meaning that you can streamline your estate plan. However, you should consult with an estate attorney to figure out if this is the right decision for you and your estate.
- Easy Distribution of Assets
Again, the distribution of income and capital is handled by the trustee, meaning that there is a simplicity and ease in the delivery of trust assets. However, it is sometimes necessary to have safeguards in place, like establishing a board of appointees to oversee trustee decisions.
A discretionary tool might be right for you and your estate. However, talk to an experienced estate planning attorney to fully understand the intricacies of such a financial device.