When to Consider Creating a Discretionary Trust

As you work to create a comprehensive estate plan with an estate planning lawyer, you might consider the benefits of incorporating a discretionary trust into your plan for various reasons. Creating a discretionary trust can benefit your heirs, particularly if you have concerns about their ability to safeguard their inheritance.

For instance, what if your son is a doctor who fails to carry malpractice insurance? Leaving him an inheritance at the wrong time could result in the funds going to one of his patients, rather to him and your grandchildren. Likewise, what if your daughter’s marriage is not particularly stable? Do you want to leave an outright inheritance to your daughter, knowing that it could soon be subject to division in her eventual divorce proceedings?

Individuals who wish to set up enhanced asset protection for their beneficiaries might consider setting up a discretionary trust. A Florida estate planning lawyer from Kramer Green can help you determine whether a discretionary trust is the right type of estate planning mechanism to meet your needs.

Understanding How Discretionary Trusts Work

In a discretionary trust, the trustee, who is not a beneficiary of the trust, has discretion over the trust assets. The trustee has the sole authority to determine when and if to distribute the assets and/or principal of the trust to any class of beneficiaries, either all at once or periodically. Additionally, the trustee has the power to give all the trust assets to one beneficiary to the exclusion of the others. Even a trust that gives a trustee the power to distribute based upon certain ascertainable standards, such as for the beneficiary’s support, education, and healthcare, is still considered a discretionary trust.

Therefore, as in the example above, if you want to protect your son’s inheritance from potential malpractice lawsuits, you could place his share of the inheritance in a discretionary trust that benefits him, his descendants, and optionally, his spouse. The Trustee of the trusts would not be your son. Instead, a third-party Trustee would have the sole authority to determine whether to retain the assets in trust or distribute the income and/or principal.

Spendthrift Provisions in a Discretionary Trust

A discretionary trust may or may not contain so-called “spendthrift” provisions. A “spendthrift” trust is a trust containing language to the effect that trust assets are neither voluntarily nor involuntarily assignable by the beneficiary. More specifically, under Florida Statutes 736.0502, “a spendthrift provision is valid only if the provision restrains both voluntary and involuntary transfer of a beneficiary’s interest.” Furthermore, the document must provide that “the interest of a beneficiary is held subject to a spendthrift trust”, or words of similar import to sufficiently restrain both voluntary and involuntary transfer of the beneficiary’s interest.

Creditors of Trust Beneficiaries

Even if a discretionary trust does not contain spendthrift language, a creditor cannot intercept the beneficiary’s right to present or future distributions from the trust through legal process. Therefore, in our example involving your son, if your son’s inheritance is held in a discretionary trust, regardless as to whether it contains spendthrift language, his patients and regular creditors cannot touch it.

What is less clear is whether your son’s spouse, former spouse, or children with court orders for support or maintenance can intercept his right to distributions from the discretionary trust. Although a literal reading of the Florida Statutes provides that support obligations for a spouse, former spouse, or child do not constitute an exception to this rule, there is at least one court that has ruled otherwise.

Contact Kramer Green for Assistance with Your Estate Planning Matter

The Florida estate planning attorneys of Kramer, Green, Zuckerman, Greene & Buchsbaum, P.A. are ready to help you and your family through every step of creating the estate plan that best suits the needs of you and your family. We know how to most effectively and efficiently draft the documents necessary to avoid the time and expense involved in probate proceedings and protect your heirs.

Our objective is to guide you through the complex legal matters that estate planning can involve. In addition, we want to help you lessen the burden on the surviving loved ones you will leave behind. Contact our office today at (954) 966-2112 or reach out to us online to schedule a time to discuss your legal estate planning issues with our attorneys.

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