Discretionary Trust: A Flexible Estate Plan For Your Child

Parents are always concerned about the well-being of their children especially when they are highly dependent minors that require constant specialized care. Often, their primary concern is how to come up with the best plan to ensure that their child is well taken care of in the event they become incapacitated or when they eventually pass away. This can be done through establishing a discretionary trust through which they can put in place financial arrangements for the future care and well-being of their children.

What is a Trust?

A trust is a legal arrangement through which a parent can appoint a trusted person (a trustee) to hold and manage the funds or assets transferred to the trust (the trust fund) for the benefit of a specified person, in this case their child or children.

What is a Discretionary Trust?

The word discretion refers to a person’s ability to act as per their own judgment and conscience. In a trust arrangement, the power of discretion is usually exercised by the trustees while undertaking their duties in the discretionary trust and ought to be done in good faith and in the best interest of the beneficiaries. Based on the above, a discretionary trust can be defined as a flexible trust arrangement that enables the trustees to exercise their fair judgement while exercising their duties in the trust deed, in order to meet the beneficiaries’ changing circumstances.

What are the defining features of a Discretionary Trust?

There are three essential features that make a discretionary trust the most preferred form of family trust for parents of minors, children living with disability or unruly children. They include:

• Flexibility;

It may be difficult for a parent to predict their children’s future interests and needs while creating the trust. Therefore, by establishing a discretionary trust, the trustees can be able to meet the child’s evolving financial needs in health care, education, sports and any other legitimate activity that may require financing by the trust.

• Protection;

A discretionary trust provides protection to the beneficiaries from their own extravagant choices. For example, it allows the trustees to halt the distribution of trust income to a child especially when the parent had raised concerns about the child’s wasteful lifestyle in their letter of wishes and there is real concern on how they would cope after inheriting large sums outright. In such a case, the trustees are at liberty to hold and manage the assets of that beneficiary on their behalf and provide occasional and controlled benefits to them.

• Adaptability

A discretionary trust enables the trustees to adapt to the child’s changing health care, education and extracurricular requirements as their powers of distribution of trust fund are not cast in stone. It also makes it easier for the trustees to take advantage and align the trust to any future changes in legislation that may be of benefit to the trust.

What is the importance of creating a discretionary trust for your child?

Clients with young children often do not wish their children to inherit substantial assets at a young age. Many would prefer their children to obtain a degree, have established careers or have an understanding of financial matters, before they can benefit from the trust. In addition, when children are very young it is difficult to anticipate their future needs, some children may require more assistance than others. Discretionary trusts facilitate a wait and see approach, enabling parents to choose responsible individuals to assume the guardianship role for their child at a later stage. It also allows the trustees to quickly adapt and facilitate to the changing needs of the child.

What are the drawbacks of creating a discretionary trust?

Most may argue that discretionary trusts donate wide and unfettered discretionary powers to trustees. Such unfettered control of trust assets by trustees may lead to self-dealing, self-enrichment or general abuse of power by trustees to the detriment of the beneficiaries. Nonetheless, this can be mitigated by appointing an enforcer in the trust in accordance with the Trustee (Perpetual Succession) Amendment Act of 2021. An enforcer is a company or an individual who can be appointed in the trust to monitor the administration of the trust for the benefit of their children. Even though it is not a mandatory role, it may be prudent to include an enforcer in the discretionary trust as they can exercise a supervisory role over the trustees with the mandate to:-

1. Inquire into the status of implementation of the terms of the trust;
2. Require the trustee to remedy any breach of the terms of the trust; and
3. Pursue legal action against the trustees for such breaches.

It is important for the the enforcer of the trust to be different from the trustee(s), therefore, the two offices cannot be occupied by the same person. In the words of Herbert Hoover, the 31^st President of the United States, ‘Children are our most valuable resource’, therefore, any plans towards their future financial stability and security should be done with the utmost care and certainty. The first step for any parent should be to engage a seasoned wealth and private client lawyer to give them holistic and practical advice on how to establish a valid and effective discretionary trust. This is especially crucial when the parent’s assets are in multiple countries or is vast in nature.Please click here to download the alert.

How can we help?

The Wealth and Private Clients team at CM Advocates LLP prides itself in having a wide variety of resources, skills and experience on matters estate planning, trust management and trust administration spanning across the East African Region. It offers an edge to its clients based on its legacy of having structured, re-structured, amended, incorporated varied forms of trusts and therefore well capable of guiding you through the process of creating a valid discretionary trust. Should you have any questions regarding the subject of establishing a blind trust or a family trust, or related topic, please do not hesitate to contact  us on law@cmadvocates.com or dgichuru@cmadvocates.com

Contact Persons & Contributors

Dianah M. Gichuru –Partner & Head of Unit  Shalma E. Maina- Associate

Disclaimer

This alert is for informational purposes only and should not be construed as legal advice.