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

Leaving your hard-earned assets outright to your children, grandchildren or other beneficiaries after you die will make their inheritance easy prey for creditors, predators, and divorcing spouses. Instead, consider using discretionary trusts for the benefit of each of your beneficiaries.

What is a Discretionary Trust?

A discretionary trust is a type of irrevocable trust that is set up to protect the assets funded into the trust for the benefit of the trust’s beneficiary. This can mean protection from the beneficiary’s poor money-management skills, extravagant spending habits, personal or professional judgment creditors, or divorcing spouse.

Under the terms of a typical discretionary trust, the trustee is limited in how much can be distributed to the beneficiary and when the distributions can be made. You can make the terms and time frames as limited or as broad as you want. For example, you can provide that distributions of income can only be made for health care needs after the beneficiary reaches the age of 21, or you can provide that distributions of income and principal can be made for health care needs and educational expenses at any age.

An added bonus of incorporating discretionary trusts into your estate plan is that the trusts can be designed to minimize estate taxes as the trust assets pass down from your children to your grandchildren (this is referred to as “generation-skipping planning”). In addition, you can dictate who will inherit what is left in each beneficiary’s trust when the beneficiary dies, which will allow you to keep the trust assets in the family.

While the distribution choices that can be included in a discretionary trust are virtually endless (within certain parameters established under bankruptcy and creditor protection laws), the bottom line is that a properly drafted discretionary trust will protect a beneficiary’s inheritance from creditors, predators, and divorcing spouses, avoid estate taxes when the beneficiary dies, and ultimately pass to the beneficiaries of your choice.

Where Should You Include Discretionary Trusts in Your Estate Plan?

Discretionary trusts should be included in all of the trusts you have created that will ultimately be distributed to your heirs, including:

• Your Revocable Living Trust
• Your Irrevocable Life Insurance Trust
• Your Standalone Retirement Trust

What Should You Do?

If you are concerned that your children, grandchildren, or other beneficiaries will not have the skills required to manage and invest their inheritance or will lose their inheritance in a lawsuit or divorce, then talk to your estate planning attorney about how to incorporate discretionary trusts into your estate plan.

Why Does Probate Take So Long?

Probate can be easily avoided, but most estates are dragged through the process. Why? Many people fail to create an estate plan, so probate is required. And – others plan with just a Will, so probate is required. As a result, assets end up at the mercy of the court system, open to public scrutiny, and delayed passing to beneficiaries.

Frustratingly, probate can drag on for months – or even years. Here are some of the most common reasons why probate takes so long:

1. Many Beneficiaries. In general, estates with many beneficiaries take longer to probate than estates with just a few beneficiaries.

Why? It takes time to communicate with each and every beneficiary and, if documents need to be signed, there are always beneficiaries who fail to return their signed documents in a timely manner. Regardless of advances in modern technology and communications, it simply takes a long time to reach multiple beneficiaries, spread out across the United States or in a foreign country.

2. Estate & Inheritance Tax Returns. Estates are required to file an inheritance tax return in the Commonwealth of Pennsylvania. And, Estates required to file an estate tax return at the federal level are usually complicated. The personal representative can’t make a final asset distribution until she is absolutely sure that the state inheritance tax return and the federal estate tax return have been accepted and the inheritance/estate tax bill(s) has/have been paid in full. At the federal level, it can take up to a year before the IRS gets around to reviewing and accepting an estate tax return.

3. Angry Beneficiaries. Nothing can drag out the probate process like a family feud. When beneficiaries don’t get along or won’t speak to each other, the personal representative may be forced to go to court to get permission to do just about everything. That takes time.

4. Incompetent Personal Representative. A personal representative, who is not good with money, irresponsible, disorganized, or busy with his job or family, will drag probate on and on. Why? Because a personal representative must efficiently and effectively handle the responsibilities and duties that go along with serving. It’s a lot of work.

What Can Be Done to Speed Up Probate?
The best way to speed up probate is to avoid it altogether. Avoidance is the only way to eliminate probate delays. If properly drafted and funded, a Revocable Living Trust will avoid probate perils, stresses, and delays.