Trusts offer a great deal of flexibility in their drafting to accomplish various estate planning goals. The amount of freedom the Grantor allows the Trustee when making distributions from the Trust assets is one of these areas of flexibility. This offers yet another classification for trusts: Discretionary and Incentive trusts.
Discretionary Trusts
With a Discretionary Trust, the Grantor delegates most or limited discretion to the Trustee to decide when and how much income or property is to be distributed to a Beneficiary. A Discretionary Trust normally provides the Trustee with general guidelines for administration of the Trust, but leaves the specifics of the Trust management to the discretion of the Trustee, giving him/her a great deal of leeway. Discretionary Trusts are often used with the establishment of a Family Trust.
In a Fully Discretionary Trust, the Trustee has a great deal of freedom in deciding how best to handle the Trust property and the timing and amount of distributions to Beneficiaries. This is a very common type of Trust used in estate planning because it is extremely flexible and it is the least costly to draft.
Incentive Trusts
An Incentive Trust provides guidelines and limits for distributions based on the class, status and/or behavior of the Beneficiaries. The Grantor sets these guidelines and limits according to his/her intent for the management of the Trust property.
With these types of trusts, distributions are often conditional and will only be made when the Beneficiary meets certain conditions. Therefore, the Beneficiary has an incentive to act or behave as the Grantor requires them to.
Some common Incentive Trust provisions include: completion of college, attending a particular school, or maintaining a specific GPA; getting married or re-married, having children, or living in a specific location; working in a specific field, joining the family business, starting a new business, or attaining a specified income level; and avoiding negative behavior, such as drug and alcohol abuse, gambling, or criminal behavior.
Types of trusts and Living Trusts - HG.org. (n.d.-e). https://www.hg.org/types-of-trusts.html