What is a Discretionary Trust?

Discretionary trusts are trusts or mutual fund programs that are structured to allow the trustee a fair amount of leeway in administering the resources of the trust. In the case of a mutual fund, the trustee is not limited to investments in particular types of securities. This approach to a trust arrangement usually takes place when the grantor has a high degree of confidence in the ability of the trustee to manage the discretionary trust to the benefit of all persons concerned.

When it comes to a trust fund, a discretionary trust normally provides the trustee with general guidelines for administration of the trust, but leaves the specifics of the managing the trust to the discretion of the trustee. For example, a parent who established a trust for a minor child may specifically grant the trustee the authority to disburse funds that will aid in furthering the child’s education. With a discretionary trust, it is up to the trustee to determine what represents an educational opportunity for the child. From this perspective, the trustee may authorize the release of funding for attending workshops and seminars that are deemed to increase the knowledge base of the child, as well as use the trust to pay for attendance at an accredited college or university.

A discretionary trust sometimes provides the trustee with the flexibility to adjust the amount of financial support that is provided to the beneficiaries over a given period of time. Under these terms, the trustee may choose to provide the beneficiary with an increase in a monthly allowance, based on a rise in the general cost of living. At the same time, the trustee may choose to decrease the monthly allowance if there is some suspicion that the beneficiary is not using the allowance as the grantor intended.

A discretionary trust approach is often employed with the establishment of a family trust. This makes it possible to concentrate all the family assets into a common pool or resources that are then disbursed to family members who are recognized as beneficiaries. With a family trust, the trustee usually sees to the continued investment of the resources in the trust, so that the beneficiaries will enjoy a steady income from the trust for a number of years. Effectively growing the resources of the trust also allow the trustee to provide assistance to the beneficiaries when they wish to make a major purchase, such as a first home, or to pursue a career that requires more study than a basic four-year degree program.