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Discretionary Trusts

Posted 6 years 207 days ago ago by Danielle Streed

Discretionary trusts have been around for a significantly long time. However,  it is important when setting up a discretionary trust that you understand that there are  different types of discretionary trusts. The  language that you use is extremely important as each beneficiary that you are providing for may have different needs and limitations.  

For example, you may have a trust with discretionary provisions for the trustee which could include the right to give the beneficiary all net income or a percentage of the principal. You could have a discretionary type trust with ascertainable standards which means that you have given the trustee the power to distribute income and/or principal for the beneficiary’s health, education and welfare.  

These discretionary standards may work well IF the beneficiary is not receiving government benefits such as SSI or Medicaid. If the beneficiary is receiving either or both of these benefits, the last two examples of discretionary income will affect those benefits. In other words, those benefits could be cut and the beneficiary will be required to live off of the trust assets or spend down the trust assets before reapplying for government assistance.  

If you truly want to protect a beneficiary from losing their benefits, your discretionary trust must provide the trustee with pure and unfettered discretion to make any and all distributions to or for the benefit of the beneficiary.  In other words, the beneficiary has absolutely no right to control or demand anything. Not only does this protect the beneficiary’s benefits mentioned earlier, but it can also eliminate the beneficiary’s ability to sue the trustee to demand distribution.  The discretionary trust provision that gives the beneficiary the right to income or the right to funds for health, education and welfare is something tangible enough to give them grounds to sue if the trustee has chosen that such distribution is not in the beneficiary’s best interest. 

Whereas if the trustee has pure and unfettered discretion...then the trustee’s discretion controls.  If you have set up a trust and have not reviewed it in some time, now is a good time to pull out the document and review the language of the trust. Is it clear what obligation the trustee has to the beneficiary?  Does the beneficiary have too much discretion?  Will benefits be lost based on the language of your trust?

In a recent case in Ohio, a beneficiary of a trust applied for Medicaid.  The  beneficiary was denied because the court ultimately determined that she was the beneficiary of a trust that contained mixed language.  In other words,  the trustee had discretion and ascertainable standards that in essence gave the beneficiary access to trust funds.  The agency denied the government benefits and the Court of Appeals of Ohio upheld that decision.

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