Paralegal Advanced Competency Exam (PACE) Practice Exam

What characterizes a discretionary trust?

1. The trustee decides which beneficiaries receive funds

2. All beneficiaries receive equal shares of the trust

3. The settlor can amend the terms at any time

4. It does not require a formal agreement

The correct answer is: The trustee decides which beneficiaries receive funds

A discretionary trust is characterized by the trustee's power to determine which beneficiaries will receive distributions from the trust, as well as the amounts they will receive. This flexibility allows the trustee to consider the specific circumstances of each beneficiary at the time of distribution. For instance, if one beneficiary is in need while another is financially secure, the trustee can choose to provide more support to the beneficiary in need, reflecting a tailored approach to distributions. The ability of the trustee to exercise discretion in distributing the trust assets is vital to the function of a discretionary trust. While this grants the trustee significant authority, it also carries the responsibility to act in the best interests of all beneficiaries and adhere to the trust's intended purpose. Other characteristics of discretionary trusts include that they do not guarantee equal distributions among beneficiaries and generally include terms established by the settlor that can vary based on the trustee's judgment. Thus, the option indicating that the trustee determines which beneficiaries receive funds accurately reflects the primary feature of a discretionary trust.