Discretionary Trust

An arrangement whereby property is set aside with directions that it be used for the benefit of another, the beneficiary, and which provides that the trustee (one appointed or required by law to administer the property) has the right to accumulate, rather than pay out to the beneficiary, the annual income generated by the property or a portion of the property itself.

Depending on the terms of the instrument that creates the trust, such income can be accumulated for future distributions to the income beneficiaries or added to the corpus, the main body or principal of a trust, for the benefit of the remainderman, one who is entitled to the balance of the estate after a particular estate carved out of it has expired. This is a discretionary trust since the trustee has the latitude or discretion to give or deny the beneficiary some benefits under the trust. The beneficiary cannot compel the trustee to use any of the trust property for the beneficiary's advantage.

In this type of trust the beneficiary has no interest that can be transferred or reached by creditors unless the trustee decides to pay or apply some of the trust property for the benefit of the beneficiary. At that time, the beneficiary's creditors can reach it unless it is protected by a Spendthrift Trust clause. An assignee, a person who has received an interest in the trust from the beneficiary by assignment (a transfer of property), can hold the trustee liable for any future payment to the beneficiary by giving notice of the assignment. As an illustration, the settlor, one who creates a trust, delivers $10,000 to the trustee in trust for the beneficiary, and the trustee has the discretion to make any and every payment, or no payment at all, to the beneficiary from the corpus or income. Before the trustee has decided to make any payment to the beneficiary, the beneficiary assigns a right to $50 of any payment the trustee elects to make to him or her. The assignee notifies the trustee of the assignment and demands that if the trustee decides to pay the beneficiary any amount up to $50, the trustee must pay the assignee and not the beneficiary. If the trustee decides not to pay the beneficiary, the assignee has no right to payment. If the trustee subsequently decides to pay the beneficiary $50, the trustee will be liable to the assignee for it.

A person can create a discretionary trust for his or her own benefit, but creditors can reach the maximum amount that the trust can apply for or pay to the beneficiary under the trust terms, regardless of whether he or she actually received payment.