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District of Columbia trusts: Deciding on trustee discretion

Many District of Columbia residents use trusts in their estate plans. Part of the process in creating trusts is deciding how much and what kind of discretion to give to trustees. Depending on the purpose of a trust, the discretion of the trustee could vary.

Most trustees distribute income from the trust to the beneficiary for four main purposes -- "health, education, maintenance and support" (HEMS). The question is whether those HEMS distributions are made at the trustee's discretion or at times and intervals specified by the grantor of the trust. Several factors could determine which way the grantor prefers distributions to be made. For many individuals, the main factors are the needs of the beneficiary and the possible tax ramifications.

Another issue for the grantor's consideration is whether the trustee may distribute or accumulate principal of the trust. The tax treatment of the trust could be different, depending on whether the trustee has the discretion to add to or subtract from the principal. The person or entity designated to act as trustee can also affect how the trust and distributions are taxed.

Deciding to create a trust is sometimes the easiest part of the process. How trusts are structured and what powers and discretion are given to trustees depends on what the grantor wants to achieve. Trusts can contain as many reasonable restrictions and grant as much discretion as appears necessary. However, District of Columbia residents who choose this estate planning option may also wish to ensure that the trust assets are safeguarded from any potential abuse. Striking a balance may seem difficult, but a working knowledge of the applicable laws and trust requirements could go a long way toward achieving the desired results.

Source: wealthmanagement.com, Estate Planning Shades of Grey, Joseph C. Mahon, Dec. 11, 2013

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