A discretionary distribution provision in an asset protection trust gives the trustee the authority to decide whether to make a distribution of trust income and/or principal to a beneficiary. When a beneficiary is being sued, or at risk of litigation, the trustee might decide to halt distributions until the matter is resolved.
Discretionary distribution provisions protect the assets of the trust from creditors of the beneficiary. They preserve the intent of the settlor in forming the asset protection trust – to protect his assets and distribute them to his heirs, not the creditors of his heirs.
The discretionary distribution provision might be unlimited:
“…the Trustee may, in their sole and absolute discretion, may or apply the whole, any portion, or none of the net income of the Trust to, or in any manner the Trustee deems to be for the benefit of all, or any one or more of the Beneficiaries.”
Or, the discretion may be limited by the settlor when he drafts the offshore trust:
“…the Trustees may, in their discretion, pay to or apply for the benefit of the Beneficiary, so much of the net income of his separate trust as the Trustees deem advisable to provide adequately and property for the support, maintenance, health, medical care (including, but not limited to, dental, chiropractic, cosmetic, surgical, and psychiatric care), welfare, education (including, but not limited to, private schools, tutoring, college, professional, vocational, language, artistic studies, and other post-graduate education), comfort, and emergency needs of the Beneficiary, and to enable the Beneficiary to Maintain his/her accustomed standard of living, purchase a home, and/or invest in purchase, or commence a business venture.”
The purpose of these discretionary distribution provisions is to limit the beneficiary’s right to demand the income or assets of the trust and place decision making and control with the trustee. By so doing, the offshore asset protection trust protects those assets from creditors of the beneficiary.
The beneficiary is not the owner of these assets, they are owned and controlled by the trust in the person of the trustee. Because the beneficiary is not the owner of the assets, they can’t be taken from him by a creditor.
I hope you’ve found this article on the discretionary distribution provisions of asset protection trusts to be helpful. For more information on how to structure an offshore trust, please contact me at firstname.lastname@example.org or call us at (619) 550-2743. All consultations are free of charge and confidential.