California offers a myriad of trusts that can be established as part of your estate plan. The key is determining which ones are best for your goals and your family. Here we’re going to look at discretionary lifetime trusts – what they do and how they differ from other kinds.
One reason that many people establish this type of trust is that it can protect a beneficiary’s inheritance from creditors and judgments in lawsuits. It can also protect assets from going to a spouse in a divorce.
These protections are not guaranteed, however. The trust has to be set up very carefully.
What makes the trust “discretionary?”
Payouts are made at the discretion of the trustee. Often, the grantor will designate their wishes regarding under what circumstances the funds can be distributed – such as when a beneficiary reaches a particular age. The grantor may designate that a beneficiary can receive only a specific amount each year. However, the trustee isn’t legally bound by the grantor’s wishes.
A discretionary lifetime trust, if drafted properly, can create a barrier between the beneficiary and those who seek their money. Legally, the funds don’t belong to the beneficiary. They belong to the trust.
This type of trust can also protect a beneficiary from themselves, which is what “spendthrift” trusts also do. However, a discretionary lifetime trust can offer broader protection than a spendthrift trust.
Choosing the right trustee can be difficult
If you’re developing a discretionary lifetime trust with the goal of protecting the assets you’re leaving to a child or other loved one, it may be wise to designate a trustee who’s outside the family. Many people choose institutional trustees. This can help add a layer of protection for the assets because an institutional trustee, like a bank, isn’t going to be influenced by family ties or emotions.
Any trust – or any estate planning document, for that matter – is only as solid as the language in it. This is not an area where you want to do it yourself or find the least expensive option. California laws around estate planning are unique and specific. You owe it to yourself and your family to have a carefully crafted estate plan.