Plan for Heirs With Money Problems: Create a Discretionary Trust

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If you’re like many people, you want to ensure that your loved ones are taken care of after you’re gone. But what happens if they have money problems, such as overspending, running up credit cards, balancing on the edge of bankruptcy, or other risky behaviors? A discretionary trust can help! These trusts protect your assets from creditors and ensure that, instead, your heirs receive the full benefit. Let’s look at how a discretionary trust works and how you can use one to plan for heirs with money problems.

What is a Trust?

What can you do when you want to pass down an inheritance but know that your heirs would run through a lump sum like water in a sieve? Trusts are the vehicle you can use to hold your assets for your heirs in a way that keeps the money safe from their bad decisions or spending habits.

A trust is a legal framework allowing someone else (the trustee) to pass your assets on to your heirs in the way you direct. When you draw up a discretionary trust with an attorney, you choose a trustee to hold your assets “in trust” for your heirs. Payouts work differently depending on the type of trust.

Many different types of trusts exist in North Carolina, each with its benefits and drawbacks. Talking with your estate planning attorney can help you decide which kind of trust you would benefit from.

What is a Discretionary Trust?

Because a discretionary trust is irrevocable, you no longer own the assets you place in it once you set up the trust. Instead, the trust owns those assets. It can be challenging to change an irrevocable trust. Still, it is the perfect vehicle to protect assets for future use.

With a discretionary trust, the trustee only pays beneficiaries when or if they’ve determined it makes sense. The trustee has total and absolute power over whether and when an heir inherits anything. (1)

Because the language of trusts is complex and laws change every few years, it’s crucial to draw this type of legal document up with an experienced asset protection planning attorney. For a discretionary trust to work, it must be unimpeachable in a court of law.

How Does A Discretionary Trust Work?

A discretionary trust allows the trustee to decide when and how to distribute assets to beneficiaries. The trustee has control over the trust assets, but they must act in the beneficiaries’ best interests by law. A trustee can’t use trust assets for their own purposes – they’re bound by a fiduciary duty.

With a discretionary trust, beneficiaries (your heirs) can’t make requests or demands of assets from the trustee. The trustee can direct how and when payments go out to heirs (if at all!) (2)

Trust assets enjoy insulation from the reach of creditors. However, once the money distributes to the heir(s), a creditor may claim the funds. (3)

A trustee can use the discretionary trust to pay for beneficiaries’ groceries or rent instead of giving them a lump sum. For example, if a beneficiary has significant credit card debt, the discretionary trust can continue paying for items the beneficiary needs rather than paying their credit cards down.

How Can a Discretionary Trust Help Heirs with Money Problems?

Since creditors can seize lump sum trust disbursements, the last thing you want to do is give a cash gift to reckless heirs. Why would you give a lump sum inheritance to an heir on the verge of bankruptcy?

Instead of giving cash to heirs, the trustee can pay your heirs’ expenses. With multiple creditors ready to seize any inheritance, discretionary trusts can cover items such as:

  • Groceries
  • Clothing
  • Tuition
  • Mortgage/ Rent
  • Insurance policies
  • Utilities
  • Services for home or personal care

By paying for items instead of giving a lump sum to your heir, the trust funds never belong to your heirs. The trust system entirely bypasses them. Since your beneficiaries do not own the trust, creditors can’t touch the assets inside.

Planning for the Future with a Discretionary Trust

When you create a discretionary trust, you give the trustee discretion over when and how to pay your heirs. Their discretionary decisions can prevent your hard-earned money from going up in smoke.

If you have an heir with money problems, using a discretionary trust as part of your estate planning ensures they receive needed services, items, and funds without putting assets at risk. Talk with an experienced estate planning attorney to learn more about discretionary trusts and other types of trusts that may benefit your family’s future.

Trusts Maximize Your Assets

In addition to all the benefits above, trust-based estate plans ensure privacy throughout any incapacity you may face. They also prevent your family from going through court-mandated probate after your death. 

Trusts can also help you qualify for government help for long-term care expenses and protect your assets from your potential creditors after your death.

We Can Help

At Vail Gardner Law, we focus on estate planning strategies, giving you the power to leave a legacy that will last for years. We want to understand the details of your situation before recommending a trust best for your unique circumstances. Contact us today to start drawing up plans that protect you and your heirs for generations.