When creating a trust, you face a critical decision: Do you want your beneficiaries to receive guaranteed checks, or do you want your trustee to decide when and if they get paid?
The latter is called discretionary authority, and while it sounds strict, it’s often the kindest way to protect your wealth and your family from unintended consequences.
What Is Discretionary Authority in a Trust?
In a standard mandatory trust, the trustee must distribute money at set times. For example, “All income must be paid to my son annually” leaves no room for flexibility, even if paying that money would harm your son’s financial situation.
In a discretionary trust, the trustee has the legal power to say no. They are given the authority to distribute assets only when they deem it appropriate. This transforms the trustee from a simple delivery service into a gatekeeper who protects the assets from creditors, ex-spouses, and poor decisions.
When Is Discretionary Authority the Right Choice?
You should strongly consider giving your trustee discretionary power if any of the following apply to your beneficiaries.
If your heir works in a high-risk profession like medicine, real estate development, or business ownership where lawsuits are common, discretionary trusts shield the assets from their legal battles. The trust assets remain protected even if your heir faces significant liability.
If a beneficiary is experiencing marital instability, a discretionary trust prevents their inheritance from becoming marital property in a divorce settlement. Since they don’t have an automatic right to the money, it typically stays outside the divorce proceedings.
For beneficiaries struggling with addiction or spending problems, a mandatory check can be dangerous. Discretion allows the trustee to pay vendors directly, such as a treatment facility or landlord, rather than giving cash to the beneficiary.
If you have a beneficiary with special needs, the trustee must have full discretion to preserve eligibility for government benefits like Medi-Cal or SSI. If the beneficiary has a legal right to the money, they will likely lose their benefits.
What Is the HEMS Standard?
You don’t have to give your trustee unlimited power. Most estate planning attorneys in Calabasas draft discretionary trusts using an ascertainable standard known as HEMS.
This limits the trustee’s discretion to four specific categories: Health (medical bills and insurance), Education (tuition and books), Maintenance (mortgage and rent), and Support (standard of living expenses).
This standard provides the best balance. It protects the assets from creditors while ensuring the trustee can’t withhold money arbitrarily. They must pay for your heir’s basic needs within these categories.
Who Should Hold Discretionary Power?
This is the most critical rule: Do not make the beneficiary the sole trustee of their own discretionary trust. If your son is both the trustee and the beneficiary, a court may rule that he has full control, destroying the creditor protection you intended to create.
To work effectively, you need an independent trustee, such as a professional fiduciary, a corporate trustee, or a trusted family friend, to act as the gatekeeper.
Creating Protection That Works
Giving a trustee discretion isn’t about controlling your family from the grave. Rather, it’s about arming them with a shield against life’s unexpected challenges.
We can help you determine whether a HEMS standard or other discretionary provisions are right for your estate plan. Contact us at 818-334-2805 to schedule a consultation about trust planning strategies. Mention this article when you call, and we’ll walk you through creating a trust that truly protects your beneficiaries.