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Can a discretionary trust be challenged?

Yes, in some situations, a discretionary trust can be challenged if certain requirements are met, for example:

The trustee has not been performing their duties properly. For example, the trustee has not made payments to beneficiaries or paid out money too quickly. If you think this is happening, you should consider challenging the trust.

You think the trustee is acting unfairly towards your beneficiary. For example, if you believe that the trustee is refusing to pay out money because your beneficiary does not deserve it, you should consider bringing legal action against them.

There is a dispute over how the trust was set up. This could mean that the settlor did not intend the trust to operate as it does. If you feel that this is the case, you should consider taking legal action.

You think that the trustee did something illegal. For example, they stole funds from the trust account or committed fraud. If you think this happened, you should consider legal actions against them.

The trustee has breached their fiduciary duty. A breach of fiduciary duty means the trustee has acted dishonestly when dealing with the trust. For example, they used the trust fund to buy expensive gifts. If you think they have done this, you should consider challenging the trust fund.

The trustee is mentally incompetent. That is, they do not understand the purpose of the trust. If you think that this is the case and that the trustee cannot manage the trust, you should consider removing them from office.

What is a discretionary trust?

A discretionary trust gives trustees the discretion and flexibility to make decisions on behalf of beneficiaries without going through probate court proceedings. That means they have the power to decide what happens with the trust fund, including who gets what and when.

At its core, this may appear as an unattractive and unbiased model for estate planning. However, it is one of the best ways for settlors to take care of the unknown future needs of their beneficiaries. Most settlors usually use discretionary trust, hoping that the trustee will make the best decision, considering the current circumstances.

What is the purpose of a discretionary trust?

A discretionary trust allows the settlor (the person who sets up the trust) to give some control of the trust to the trustee. This way, the trustee can manage the trust according to the settlor’s instructions. It also gives the trustee the ability to determine whether or not to distribute money to the beneficiaries.

What rights do beneficiaries have under a discretionary trust?

The trustee may have an absolute say in deciding whether or not to distribute funds, but the beneficiaries also have their rights under a discretionary trust. These include:

  • The right to receive distributions when they become payable
  • The right to receive fair treatment from the trustees
  • The right to request the trustee the trust’s documentation
  • The right to appeal to the court to remove a trustee
  • The right of appeal if the trustee makes a decision that goes against what the settlor wanted

Who owns the assets in a discretionary trust?

When a trust is created, the initial owner of the assets is known as the “settlor.” Then, when the trust comes into existence, the assets are transferred to the trustee. However, the trustee only holds the assets on behalf of the beneficiaries.

Key takeaways

In a quick recap, here are the key things to remember about a discretionary trust:

  • A discretionary trust is an arrangement where someone other than the settlor controls the distribution of the trust’s assets.
  • A trustee manages the trust and determines how and when the trust will be distributed.
  • Beneficiaries have certain rights under a discretionary trust, including the right to receive distributions when payments come due.
  • Beneficiaries can challenge the discretionary trust under specific circumstances, including if the trustee acts unfairly to a beneficiary or fails to perform their duties properly. 
  • The assets of a discretionary trust belong to the beneficiaries. The trustee holds these assets on behalf of the beneficiary.

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