What Is A Discretionary Trust? – Advantages And Disadvantages

Facebooktwittergoogle_pluslinkedin

If you don’t already know how a trust works, take a look at a previous article, which explains what an asset protection trust is.

Having a discretionary trust means, that beneficiaries don’t have any fixed entitlement to the trust fund. The trustee has discretion on how assets are distributed to beneficiaries, based on the instructions outlined in the trust document. Let’s take a look at the discretionary trust advantages and disadvantages.

What Is A Discretionary Trust - Advantages And Disadvantages - Infographic

Advantages

  • Asset protection – With a discretionary trust, assets are protected from creditors. In case of a lawsuit, divorce and also when irresponsible beneficiaries are involved. No beneficiary can demand a benefit from such a trust, because management of assets can’t deviate from the instructions spelled out in the trust document. A common scenario that plays out, are kids of wealthy parents that get their inheritance, which then end up spending everything they have irresponsibly. Trust assets won’t automatically be included as part of a beneficiary’s property. The benefit is then that if a beneficiary is sued, whatever the trust owns will still be protected, and out of reach of any creditor.
  • Flexibility – The discretion given to trustees, provides them the freedom to adapt distributions to the needs of beneficiaries. And therefore look after those that need help the most, depending on the situation of each beneficiary.
  • Inheritance tax – Depending on what country in the world you pay taxes to, it is possible to limit taxation on inheritance. Something that is common with family trusts. The public’s perception of offshore trust services, is often that it’s an easy way to completely eliminate taxes. Some companies also perpetuate this claim, but the truth is that a trust doesn’t give you any outrageous tax benefits, beyond what’s reasonable.

Disadvantages

  • Loss of control – By giving broad discretion to the trustee, assets are placed outside of your control. Even though you can still keep the right to manage trust assets, which prevents the trustee to take any undesirable actions.
  • Expenses – A trust isn’t an inexpensive way of protecting assets. Except for annual maintenance fees, the trustee might have to pay for legal, accounting and investment advice.

Conclusion

If you have wealth that either needs to be protected, or you want to pass everything on to future generations, a discretionary trust can be an essential tool for that.

You do have other vehicles that can be used, to try and achieve the same end goals, but they aren’t nearly as effective as a trust.

Related Posts

About The Author

Admin

Fredrik helps high net worth individuals with creating international asset protection strategies. To keep anything from currency, real estate, precious metals and any other kind of investment protected from an unexpected lawsuit.