A well-drafted discretionary trust protects assets — and promotes heirs’ happiness

Say the words “too much money” and people laugh, because “there is no such thing as too much money”. Money is the reward for our work, the bedrock of our security, and the vehicle for the fulfillment of our desires. Yet, many affluent people are fearful of transferring their assets at death to heirs, and with reason.

At first, trusts were used only to hold assets if an heir was a minor, and assets were distributed once the heir reached adulthood. With time, as heirs were perceived to mature later in life, larger trusts were drafted to hold assets and distribute assets at specified ages, say 25, 35, and 45.

For very wealthy families, a new kind of trust was designed in the early 20th century: a discretionary “Dynasty” trust. These trusts did not distribute assets, but instead kept assets in trust indefinitely, distributing only for certain needs of beneficiaries, such as health, education, medical expenses, and general welfare.

A trend today for the merely well-to-do, but not incredibly rich, is creating what the DuPonts and the Rockefellers have been using for generations: trusts that do not automatically distribute assets to beneficiaries, but instead keep assets in a fully discretionary trust to protect both the assets and beneficiaries.

Assets, once distributed to a beneficiary, are immediately available to creditors, predators, accident victims, and future ex-spouses of the beneficiary. Assets in a trust that pay a set amount to a beneficiary are potentially available to predators and creditors if they sue the beneficiary, win, and get a court order directing the trustee to pay part of the beneficiary’s future income to them until the judgment is satisfied. That is because the law makes available to a creditor anything a debtor has an absolute right to receive. In a trust that is discretionary, however, where a beneficiary has no absolute right to distributions, the creditor can find no remedy in going against trust assets.

A discretionary trust, where a beneficiary has no absolute right beyond health, education, and maintenance, can still greatly benefit a beneficiary. A beneficiary may have a possibility of receiving a distribution without having a right, if the trust is correctly drafted. Additionally, it can be drafted to allow the trust to buy a house or a business owned by the trust for the benefit of the beneficiary; pay for vacations; give birthday/Christmas gifts, and so on. The trustee can also directly pay for the expenses of the beneficiary instead of giving anything to the beneficiary, so the beneficiary’s life needs are met even if the beneficiary hasn’t a penny to his or her name and remains creditor-proof.

But what about the flip side: not protecting the assets from a beneficiary (or creditors), but protecting a beneficiary from the assets, from an aimless life of automatic income? Wealth can create self-entitled, unfulfilled, or self-destructive heirs. Recent studies have shown what wealthy families have always known: A person needs an occupation (whether it’s a paid position or not) to have a sense of self-worth, and a sense of self-worth is capital for happiness.

A discretionary trust can help with that. The trustee can be instructed in the trust document to limit distributions if the beneficiary, in the opinion of the trustee, has substance addiction or gambling issues, wants to just stay home and watch TV all day, or otherwise would not truly benefit from trust distributions facilitating an aimless lifestyle. In that case, the trustee can use assets to pay only for basic living expenses and for rehab or counseling.

It’s a great carrot for a beneficiary: Be involved with the world and contribute to it, and trustee will keep you in luxury. Stay home or do nothing but play, and trustee will see only to your basic needs.

Many studies show that a key factor for happiness is gratitude. A beneficiary of automatic trust distributions often ends up taking the “trust salary” for granted, finds it insufficient, and will forever envision how truly happy they would be if they were to receive more from the trust (no matter how much they receive, as it is human nature to always want more). With a well-drafted discretionary trust, the beneficiary is not guaranteed anything beyond a safety net to provide for basic needs. Each time the beneficiary receives a distribution beyond the beneficiary’s basic needs, the beneficiary is grateful. By not transferring wealth, a discretionary trust accomplishes a double goal: Assets are protected from predators, and they are used to promote happiness down the generations for heirs.

▪ This is an opinion piece written for Business Monday’s “My View” space in the Miami Herald. The views expressed do not necessarily reflect those of the newspaper.

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