A client is establishing a trust to provide for their minor grandchildren. They want to ensure that the assets are managed by a professional and that the income and principal distributions are made at the trustee's discretion, without the grandchildren having direct control over the assets until a specified age. Which type of trust would best suit these objectives?
- AGrantor trust.
- BSimple trust.
- CComplex discretionary trust.
- DRevocable living trust.
Show answer & explanationAnswer & explanation
Correct answer: C. Complex discretionary trust.
A complex discretionary trust allows the trustee to make discretionary decisions regarding income and principal distributions, which aligns with the client's desire for professional management and control over distributions to minor grandchildren until a specified age. It is 'complex' because it can accumulate income and make charitable contributions, and 'discretionary' because distributions are at the trustee's judgment.
Why the other options are wrong
- A. A grantor trust is where the grantor retains control and is taxed on the trust's income, which doesn't directly address the distribution control for grandchildren.
- B. A simple trust must distribute all income annually and cannot make principal distributions or charitable contributions, which doesn't fit the discretionary principal distribution goal.
- D. A revocable living trust can be changed or dissolved by the grantor, which might not provide the desired long-term control for grandchildren's assets.
Complex Discretionary Trust
A type of trust where the trustee has the discretion to distribute or accumulate income, make principal distributions, and potentially make charitable contributions. It does not have to distribute all income annually.
- Trustee has discretion over income and principal distributions.
- Can accumulate income.
- Can make charitable contributions.
- Often used for beneficiaries who are minors or need protected assets.
Memory trick: Complex discretionary: The trustee's choice, the children's voice (later).