Discretionary Trusts

Question 1

Discretionary Trust

Answer 1

In this, a trustee is given discretion whether to withhold payments of income or principal to Bs.

B does not have right to income until trustee exercises power and creditor cannot compel payment (even if no spendthrift clause).

However, once trustee has been served with process, he cannot exercise his power in favor of the B without first satisfying the creditor’s claim.

Question 2

Creditor’s Rights

Answer 2

If trustee exercises discretion and elects to make payments, trustee must make those directly to creditors or assignees if the trustee has notice (unless protected by spendthrift clause).

Question 3

Beneficiary’s Rights

Answer 3

B cannot interfere with exercise of trustee’s discretion unless the trustee abuses his power. Abuse = bad faith or dishonesty.