Discretionary trusts give trustees something most fiduciary roles don’t: real latitude. Instead of following a fixed distribution schedule, a trustee is asked to exercise judgment, weighing a beneficiary’s current needs against the trust’s long-term purpose, all while staying inside the boundaries the grantor set. That flexibility is the whole point of a discretionary trust, but it’s also the primary driver of risk. Every discretionary decision a trustee makes is a decision someone else could later question, and “I thought it was the right thing to do” is not a defense on its own.
Discretion Isn’t the Same as Unlimited Freedom
Most discretionary trusts direct the trustee toward some kind of standard, even when the word “discretion” appears front and center. The most common is HEMS (health, education, maintenance, and support) a standard that originated in federal tax regulations rather than estate planning practice but has since become the most commonly used ascertainable standard in trust documents nationwide. Other trusts use broader language like “best interests,” “comfort,” or even “happiness,” each of which grants progressively more latitude but doesn’t eliminate the trustee’s underlying duty to act reasonably and in good faith.
Even trusts drafted with “absolute” or “unfettered” discretion don’t free the trustee from oversight. State trust codes, most of them derived from the Uniform Trust Code, make clear that no matter how broad the grant of discretion, a trustee must still exercise it “in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries” (see, for example, Ohio Revised Code § 5808.14, which codifies this UTC provision). Courts have consistently held that “absolute discretion” is a description of scope, not a shield from accountability.
Why Discretionary Trusts Draw Extra Scrutiny
Because the trustee is the one interpreting ambiguous language and applying it to a beneficiary’s specific circumstances, discretionary trusts tend to generate more disputes than trusts with fixed, mandatory terms. Beneficiaries who feel underserved, or remainder beneficiaries who feel a trustee has been too generous with current distributions, have grounds to challenge decisions, and the trustee bears the burden of showing the decision was reasoned, not arbitrary. Legal scholars note that fiduciary obligation in wealth management has only grown more consequential as family wealth structures diversify and family dynamics become more contested, making documented, defensible process the trustee’s best protection.
This is where many individual trustees, and even some less specialized institutions, run into trouble. Discretionary decision-making requires consistent standards applied across similarly situated beneficiaries, contemporaneous documentation of the reasoning behind each decision, and a process that can withstand a beneficiary’s or court’s later review. Ad hoc judgment calls, however well-intentioned, rarely hold up if challenged years after the fact.
Building a Defensible Process
A well-run discretionary trust treats every distribution decision like it might one day be reviewed—because it might be. That means documenting the request, the information considered, how it maps to the trust’s standard, and the rationale for approving, denying, or partially funding it. It also means applying that same rigor to the assets funding the trust, not just the distributions coming out of it. Trustees have an ongoing fiduciary obligation to review trust holdings, including life insurance policies, real estate, and closely held interests, to confirm they still serve the trust’s purpose.
Read More: Annual Trust Asset Reviews: A Framework for Identifying Risk and Improving Long-Term Results
Discretion also raises the stakes around conflicts of interest. A trustee weighing a discretionary distribution to a family member, or considering a transaction involving trust property, must be especially careful that personal interest never colors professional judgment. Even the appearance of self-interest can trigger liability.
Read More: Avoiding Self-Dealing in ILIT Transactions
For trusts that split authority between a trustee and a distribution or investment advisor, understanding exactly where discretion sits—and where it doesn’t—is essential to avoiding overlapping or dropped responsibilities.
Read More: Directed Trusts Explained: What Trustees Are and Are Not Responsible For
And because discretionary decisions often play out over years or decades, trustees need a process that holds up through changing markets and changing family circumstances alike, not just at the moment a distribution is requested.
Read More: Managing Trusts During Market Volatility: A Guide for Trustees
Mastering the Balancing Act
Balancing beneficiary flexibility with long-term asset preservation is difficult even for experienced individual trustees, and the fiduciary exposure only grows as families and trust assets become more complex. As a dedicated corporate trustee, LITCO brings specialized experience, consistent documentation practices, and impartial decision-making needed to administer discretionary trusts defensibly—protecting beneficiaries, grantors’ intent, and the advisors who recommend us alike. If you have a discretionary trust that could benefit from an experienced corporate trustee, request a consultation with our team today.
