A discretionary distribution provision in an asset protection trust gives the trustee sole or absolute discretion to provide either income or a bequest to a beneficiary. In many cases a discretionary trust provision provides a standard of how distributions of assets will occur. Our team has years of experience with Asset Protection Trusts.
In a majority of cases the discretionary distribution provisions include the health, education, support and maintenance of 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.
There is generally little danger in allowing the trustee this sort of discretionary power. However, there may be some potential pitfalls. For example, if the trustee is, herself, a beneficiary, then giving her the power to distribute trust assets among beneficiaries (including herself) may be tantamount to giving her a “general power of appointment” over the trust assets. Since she can give money to herself, she may be required to do so for the benefit of her creditors. Fortunately, there are ways to minimize this risk.
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.
Conclusion
You may think that your wealth is safe and that you don’t need protection. But don’t delude yourself and accept reality. Discretionary distribution provisions protect the assets of the trust from creditors of the beneficiary.
If you would like to speak to our lawyers further about Asset Protection Trusts please contact us here.
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