How to Set Up a Discretionary Trust
- 1). Select trustee(s). The trustee or trustees of a discretionary trust have more authority than in other trust arrangements. Choosing a competent and reliable trustee is essential to the formation of a discretionary trust. During your lifetime, you can serve as both the trustee and settlor, but a succeeding trustee should be appointed in the event of your death. The trustee should have an understanding of your intentions in establishing the trust, but his instructions should also be clearly described in an express trust document.
- 2). Select beneficiaries. A discretionary trust can either have specifically named beneficiaries or a class of beneficiaries from which the trustee can choose. The trust document should be clear as to the trustee's power to include or exclude beneficiaries from disbursements of assets.
- 3). Determine the trustee's powers. Even in a discretionary trust, the trustee can have fairly narrowly proscribed authority. Or, she can have the power to exercise her discretion quite broadly. Important considerations to be explained in a trust document include whether the trustee is restricted in the means by which she can manage and invest the trust's assets, whether she must disburse all the assets or preserve a corpus of assets, and whether she can grow the corpus of the trust through income generating investments.
- 4). Execute a trust document. The formal creation of the trust occurs with the drafting of an express trust document providing the information described in the previous steps. The document should clearly reflect the creation of a discretionary trust, and should be signed and notarized by the settlor.
