A discretionary trust gives the trustee discretion over how, when, and if the beneficiaries may access trust assets. Certain uses of the money might be deemed acceptable, whereas other uses will be restricted. The settlor of the trust may seek to provide guidance to the trustee but any attempt to restrict trustee’s discretion invalidates the trust. Since no asset is clearly identifiable with any beneficiary, creditors cannot attach the trust assets in payment of a loan or liability.
For instance, the trustee might distribute funds if your daughter wants to go to college, or your son wants to start a business. But if your child (or other beneficiary) has creditor problems or is faced with a divorcing spouse, the trustee can stop making distributions. If your beneficiary develops substance abuse problems, or is just generally unable to manage money, the trustee can make payments on the beneficiary’s behalf (such as paying rent directly to the landlord) without enabling the beneficiary’s mismanagement of the funds.
Thus, a discretionary trust can provide asset protection of an inheritance. A conniving ex-spouse, immovable creditor, or plaintiff in a lawsuit against your beneficiary will have a hard time breaking through that wall and accessing property you’ve left. Of course, nothing is foolproof, but a discretionary trust can make access very difficult, thus leading to minor creditors “going away,” and others settling for cents on the dollar.