A discretionary beneficiary is an individual or entity that only receives approved disbursements from a trust fund, depending on decisions made by the administrator of the trust. With this type of arrangement, the individual or entity is named as beneficiary, but only receives any benefits from the trust based on whether or not the administrator or the trustees for the trust decide that a disbursement is merited. The creation of this type of provision within a trust is often used to provide support for beneficiaries that are not yet of legal age to manage their assets, have demonstrated fiscal irresponsibility in the past, or have other issues in their lives that could lead to defeating the original purpose for the inclusion in the trust.
The rights of a discretionary beneficiary are somewhat different from those of beneficiaries who are named as eligible to receive some sort of fixed benefit from the trust. With fixed benefits, those beneficiaries receive disbursements on some sort of ongoing schedule, based on the provisions found within the trust. Typically, the originator of the trust provides instructions that administrators and trustees use to determine when, if, and how much financial support the discretionary beneficiary will receive.
One common example of a discretionary beneficiary is a minor child who has not yet reached the age specified in the terms of the trust to receive a fixed interest. In this scenario, disbursements may be made to ensure the child has resources to pay for schooling, clothing, food, and shelter, with those expenses managed by the trustees or the administrator at the behest of the trustees. Once the child reaches the age identified in the trust, he or she may be evaluated as to the ability to manage funds personally and begin to receive some sort of regular allotment from the trust proceeds.
Spouses will sometimes use this approach to provide some sort of ongoing support for the partner who is left behind. In this scenario, a trust administrator has the authority to decide how much of a monthly stipend to issue to the discretionary beneficiary, and can also provide additional funds to cover other matters deemed worthy and in line with the goals of the trust. For example, the administrator may approve a monthly living allowance, while also choosing to provide financial support to allow the surviving spouse to pursue a degree, provided that the spouse’s grade point average remained over a certain level.
Typically, the idea behind a discretionary beneficiary arrangement is to minimize the opportunity that the resources of the trust will be exhausted, making it impossible to provide some sort of financial security for that beneficiary. Laws regarding this status will vary from one jurisdiction to another, making it necessary to structure the trust with the aid of legal counsel. Administrators for this type of arrangement should be chosen with care, helping to ensure the grantor’s wishes for the performance of the trust are observed as closely as current laws and circumstances allow.
