How does a discretionary trust protect my assets from creditors?

An important consideration as you create your estate plan is whether the assets of your trust will be reachable by the creditors of your beneficiaries. For example, your beneficiary may find himself or herself in the middle of a bankruptcy proceeding, lawsuit, or divorce long after you have created your estate plan. In these cases, a discretionary trust can often protect the trust’s assets from the reach of these creditors or ex-spouses.

How a Discretionary Trust Offers Creditor Protection

The key to the creditor protection offered by a discretionary trust is the beneficiary’s lack of control. The beneficiary has no control or management over the trust assets. Instead, the trustee has the authority to make discretionary distributions of the assets to the beneficiary. The following is a general overview of how creditor protection works in these cases:

  1. Creditors cannot compel a trustee to make distributions if the beneficiary himself could not do so.
  2. If the judgment of the trustee was in good faith with regard to the decision to make or withhold discretionary distributions, the court will generally not interfere on behalf of the creditor.
  3. A court will generally not exercise its own discretion as to whether to make distributions and will instead honor the wishes of the creator of the trust who gave this authority to the trustee.

Creating an effective discretionary trust requires the knowledge and guidance of an experienced professional. Fortunately, we are here to help. We encourage you to view our client testimonials page today to see how we have helped many other clients create the estate plans that best suit their needs and goals.

James F. Roberts
Founder and owner of the Law Office of James F. Roberts and Associates, a premiere estate planning law firm