What to Know About Discretionary Trusts in Maryland
A parent of a disabled adult child may worry how the child will be provided for in the event the parent becomes disabled or dies. While a parent may want to be sure his or her child is protected, giving a disabled adult assets directly may be an invitation for bad financial choices, leave the child open to financial exploitation, and/or put the disabled child’s government benefits at risk. Here’s what to know about discretionary trusts in Maryland, and how they can be used to provide for vulnerable beneficiaries.
What is a Discretionary Trust?
A discretionary trust is a type of trust that allows a person who establishes a trust, a/k/a the “grantor,” to set aside assets, property, and funds for the benefit of one or more beneficiaries. The trust names a trustee, who is in control of managing and maintaining the assets. The trustee is often the grantor during the grantor’s lifetime and then a trusted representative after the grantor’s death.
What sets a discretionary trust apart from other types of revocable and irrevocable trusts is the authority the trustee is given over distributions made to or for the benefit of the trust’s beneficiaries. In a discretionary trust, the trustee has full decision making power (discretion) over what funds or assets are given to which beneficiaries, and when. Beneficiaries have no right to the assets held in the discretionary trust, and they are not legally considered part of the beneficiaries’ estates until they are distributed by the beneficiary.
The Advantages of a Discretionary Trust
Discretionary trusts provide grantors with a great deal of control over how their assets are used after their death. A discretionary trust can protect beneficiaries who are:
- Disabled and rely on government assistance
- In need of assistance paying for their education
- Prone to poor money-management decisions or impulsive spending
- Struggling with addiction, substance dependence, or other mental health troubles
- Subject to collections efforts by creditors
- Going through a divorce in a relationship with a financially controlling spouse or partner
- Trying to avoid paying unnecessary estate taxes
The discretionary trust documents can provide specific instructions to the appointed trustee controlling when and how distributions can be made. This allows a discretionary trust to be used for specific purposes, giving grantors control over how beneficiaries use their inheritance. For example, a discretionary trust may require a trustee to withhold funds until the beneficiary accomplishes a milestone, such as a specific birthday, graduation from college, maintaining a period of sobriety, or completing rehabilitation programs.
Using a Discretionary Trust for a Disabled Person’s Support
A discretionary trust used to provide for beneficiaries’ health, education, maintenance, and support (HEMS) is given special protection under Maryland law, making it a useful estate planning tool to provide for disabled beneficiaries who can’t care for themselves. Creditors of a discretionary trust’s beneficiaries are not allowed to compel the trustee to distribute funds to pay the beneficiaries’ bills.
This is especially helpful for Maryland residents acting as caregivers or seeking to provide for disabled people with special needs. Many government benefit programs are “means tested” – meaning that they are only paid to individuals without other assets to provide for themselves. Because a discretionary trust’s assets do not belong to the beneficiaries until the trustee distributes them, the trustee can restrict the payment of funds to prevent the special needs beneficiary from ever losing their needed government benefits.
Disadvantages of Using a Discretionary Trust
While there are many benefits to using a discretionary trust, they are not the right solution for every estate plan. The restrictions in a discretionary trust can create tension between the trustee and the beneficiary, giving the trustee control over whether the beneficiary’s bills will be paid. This can result in a lack of transparency for beneficiaries to understand how the trustee makes those decisions.
Depending on the type of assets in a discretionary trust and the restrictions placed on the trustee, it can be difficult for the trustee to maintain trust assets while also meeting the beneficiaries’ needs. It is often wise for grantors to appoint a professional trustee – for example, a law firm or the trust department of a bank – to control their discretionary trust. This can both minimize resentment between family members and reduce the chances of a trustee failing to perform his or her fiduciary duties.
Maryland Discretionary Trust Act vs Support Trusts
If you are trying to use a discretionary trust to protect and provide for a disabled child or other disabled loved one, you should know the difference between a support trust and a trust created under the Maryland Discretionary Trust Act. Maryland law recognizes a support trust – an irrevocable trust established to pay for the support of one or more beneficiaries. Support trusts prevent the beneficiary’s creditors from reaching the assets of the trust because – like in a discretionary trust – the assets belong to the trust, not the beneficiary. However, if the creditors in question were providing for the beneficiary’s support, the Maryland courts can compel the trustee of a support trust to pay their bills.
But that’s not the case if the trust was created under the Maryland Discretionary Trust Act. That statute allows a grantor to create a revocable or irrevocable trust for the benefit of a single beneficiary. The assets of that trust can’t be reached by creditors, and are exempt from claims by the State of Maryland to collect repayment for the cost of care paid to the beneficiary. If the grantor is trying to provide for a single disabled person, the Maryland Discretionary Trust Act may be the best tool for the job.
Get Help Creating a Discretionary Trust from an Experience Maryland Probate Attorney
To choose the right estate planning tool to provide for your disabled child or other disabled loved one, it’s vital to have the representation of a knowledgeable probate attorney to help you choose the right form of support or discretionary trust to meet your needs. The Law Office of Henry Nash provides adept counsel for probate and a wide variety of estate matters in Maryland, and can help you create an estate plan that provides for the people most important to you. Contact us online or call (301) 681-6274 to schedule a consultation at our Rockville Office.
