Paralegal Advanced Competency Exam (PACE) Practice Exam

What type of trust gives the trustee the authority to decide allocations?

1. Revocable trust

2. Discretionary trust

3. Irrevocable trust

4. Special needs trust

The correct answer is: Discretionary trust

A discretionary trust is the type of trust that gives the trustee the authority to decide how to allocate funds or assets to beneficiaries. In this arrangement, the trustee has the discretion to determine when and how much to distribute to each beneficiary, based on the specific terms of the trust. This flexibility can be beneficial in responding to the individual financial needs of beneficiaries as circumstances change over time. In contrast, a revocable trust allows the grantor to maintain control and make changes as desired, but does not inherently confer discretion upon the trustee concerning distributions. An irrevocable trust, once established, typically does not allow the grantor to change the terms or regain control, and distributions might be governed by specific rules without the same level of discretionary power for the trustee. A special needs trust is designed to benefit individuals with disabilities while preserving their eligibility for government assistance programs, but it also follows specific guidelines that may limit the trustee's discretion regarding distributions. Thus, the nature of a discretionary trust emphasizes the flexibility and authority granted to the trustee in making decisions about allocations to beneficiaries.