Discretionary Trusts

In a discretionary trust, the trustee has the authority to decide whether or not to distribute funds to beneficiaries. Creditors cannot force the trustee to make payments to beneficiaries, and beneficiaries can only challenge the trustee's decisions if they can prove that the trustee abused their discretion or acted in bad faith.

A trustee manages a discretionary trust for a beneficiary, Alex, who is facing financial difficulties. Alex's creditors attempt to force the trustee to distribute funds from the trust to satisfy the debts. However, the trustee refuses to make a distribution, and Alex cannot compel the trustee to pay, as the trustee has discretion over distributions. The outcome is that the creditors cannot access the trust funds.

In discretionary trusts, the trustee calls the shots, and creditors are left out in the cold.

Exams may present scenarios where beneficiaries believe they can force distributions, leading students to overlook the trustee's discretion. Students might confuse discretionary trusts with mandatory trusts, where distributions are required.

Questions often involve a scenario where a beneficiary is in financial trouble and seeks to compel a distribution, testing the understanding of the limits of a trustee's discretion and the rights of creditors.