What Are the Disadvantages of a Discretionary Trust?

With discretionary trusts, a trustee manages the trust at their sole discretion, which means they are at liberty to decide when and how to distribute trust assets to the beneficiaries. Alternatively in most trusts, a trustee manages a trust on behalf of one or more beneficiaries. Discretionary trusts also allow both discretions, to add flexibility.

As much as a trustee fully controls the assets in a discretionary trust, a trustee can only exercise legal ownership over these assets. In essence, the trust’s beneficiaries are still the beneficial owners of all assets in a discretionary trust. 

Nonetheless, if the trustee breaches their fiduciary duty or deviates from the wishes of the grantor, the trust assets may not be distributed to the beneficiaries appropriately. Consequently, the assets won’t be held in trust for the beneficiaries as initially intended. 

A discretionary trust is also irrevocable, which underscores the permanence of establishing and transferring assets into a discretionary trust. Notably, it would be wise to carefully consider your choice of trustee(s) and appoint a board of appointees to check the excesses of the trustee’s powers and privileges. Alternatively, you can choose a bank or a reputable trust company to serve as your trustee.

Also, an estate planning attorney will have to retitle any real estate covered by the discretionary trust, which means a settlor may rack up thousands in legal fees just to set up and finance the trust. It may also be pretty expensive if you factor in overall management costs and the fees payable to the trustee. 

Can a Discretionary Trust be changed?

A trustee to a fixed trust has no say on the beneficiaries or the benefits they are set to receive. On the other hand, a discretionary trust gives the trustee extensive leeway to change the discretionary trust. 

Depending on the terms put forward on the trust deed, there are a couple of ways beneficiaries can benefit from a fixed trust. For instance, the trust property may become payable to named beneficiaries upon the settlor’s death. Alternately, the trust assets may only become available to the beneficiaries when they fulfill specific conditions, such as attaining a certain age or attending college. 

Therefore, a discretionary trust is virtually the polar opposite of a fixed trust, under which a grantor retains complete control over the trust property. 

Can a Discretionary Trust Be Revoked?

As mentioned earlier, a discretionary trust is, in principle, irrevocable. Once finalized, the transfer of assets into a discretionary trust is permanent.  

Trusts are generally classified as either revocable or irrevocable trusts. While establishing a discretionary trust may seem like handing too much control to a third party, assets covered by a discretionary trust are immune from civil lawsuits filed by creditors seeking to collect debts. 

On the contrary, a revocable trust, also known as a revocable living trust, allows the settlor to exercise sole control over the trust. This way, the settlor can alter or revoke the trust depending on a change in circumstances. Moreover, a revocable trust only becomes permanent upon the settlor’s death.

What Rights Do Beneficiaries Have Under a Discretionary Trust? 

A discretionary trust allows a trustee to use their sole discretion to determine how to distribute trust assets to beneficiaries. However, beneficiaries reserve the following rights under a discretionary trust:

  • The right to be treated fairly by the trustee.
  • The right to receive payments the moment they become payable.
  • The right to request the trust’s documents from the trustee.
  • The right to appeal a trustee’s decision if they deviate from the wishes of the settlor. 

Who Enforces a Discretionary Trust? 

A trustee holds the legal title to the trust property in a discretionary trust.  The trustee has a duty to manage the property and to determine how and when the property should be distributed to the beneficiaries. 

The settlor can appoint a board of appointees to remove and appoint a new trustee if the trustee breaches their fiduciary duty or makes decisions that do not follow the settlor’s wishes.