Discretionary Beneficiary

Key Takeaways

• Discretionary beneficiaries are named in trusts or policies but only receive distributions when specific conditions set by the grantor are met.
• Trustees have a fiduciary duty to balance grantor instructions with the interests of discretionary beneficiaries.
• Conditions for discretionary beneficiaries often include reaching a certain age, completing education, or other personal milestones.
• Discretionary beneficiaries have no legal proprietary interest in the trust, making trustee judgment crucial.
• Discretionary beneficiaries can include entities such as charities; this can offer tax benefits to the grantor or estate.

What Is a Discretionary Beneficiary?

A discretionary beneficiary is a person or entity named in a trust, life insurance policy, or retirement plan who can receive distributions at the discretion of the trustee, often based on certain conditions or milestones. Unlike other beneficiaries, discretionary beneficiaries have no automatic claim to assets. Instead, their distributions are contingent upon fulfilling specific requirements, like reaching a certain age or achieving educational milestones.

How Discretionary Beneficiaries Work in Trusts and Estates

There is usually a particular reason for a person to be named a discretionary beneficiary. For example, they may be too young or have exhibited poor financial habits. While the trustees still have a fiduciary responsibility to a discretionary beneficiary, they must overall enforce the discretion stated by the grantor, unless a specific letter of intent exists from the grantor of the trust that overrides the previous instructions. Common terms attached to a discretionary beneficiary include that they reach age 18 or 21, graduate college, become drug-free, or find full employment prior to receiving disbursements. Other, more nuanced instructions may also appear on an individual basis.

While a discretionary beneficiary is usually an individual, a grantor may, at times, name an entity such as a charity. A grantor often elects to do this instead of gifting assets to a charity during his or her lifetime. In this scenario, the charity, instead of the grantor, is treated as receiving the distribution, and neither the grantor nor the estate will owe income taxes on the amount.

Comparing Discretionary Beneficiaries to Other Beneficiary Types

In addition to a discretionary beneficiary, other types of beneficiaries exist and can be named to accounts. These include a named beneficiary; these are beneficial owners of the property and will share in the proceeds at the time of disposition. In some cases, such as an annuity policy, the policyholder and the named beneficiary may be the same.

Absolute beneficiaries cannot be changed without their written consent. Absolute beneficiaries are also referred to as irrevocable beneficiaries and can be associated with a trust, an employee benefit plan such as a pension, and a range of additional instruments or contracts with a beneficiary clause. In contrast, a revocable beneficiary does not have guaranteed rights to receive compensation from a policy or a fund. In this scenario, a policy owner reserves the right to make changes to who receives payment, change the terms of the policy, or terminate the policy without consent from the revocable beneficiary.

Several trusts, wills, policies, and annuities have both primary beneficiaries and secondary beneficiaries. A primary beneficiary is first in line to receive benefits upon the account or trust holder's death. An owner can name multiple primary beneficiaries and stipulate how distributions will be allocated along. A secondary beneficiary inherits the assets if the primary beneficiary dies before the grantor. A secondary beneficiary would also be considered a "contingent beneficiary."

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