Fixed Trust vs Discretionary Trust
A fixed trust gets the amount and terms of each beneficiary's share while a discretionary trust lets the trustee make decisions about who becomes a beneficiary.3 min read
Fixed trust vs discretionary trust: A fixed trust, also known as a discretionary trust, determines the amount and terms of each beneficiary's share at the beginning. A discretionary trust lets the trustee or trustees make decisions about who becomes a beneficiary and how much each beneficiary gets.
Fixed trusts are common when a handicapped child is involved, to provide proper care for the child in the event the parents or guardians pass away. Discretionary trusts, however, have become more common than fixed trusts, and the majority of family trusts are discretionary. In some cases, a trust deed can be used to create a trust that's both fixed and discretionary.
What Is a Trust?
A trust is formed as a legal relationship when one person, the settlor, gives control of his or her assets under another with the goal of achieving a specified purpose or benefiting another person or people, called beneficiaries.
- The other party involved is called the trustee.
- The settlor's assets are transferred to the trustee, becoming the property of the trustee.
- In spite of becoming the owner of the assets, the trustee must keep the assets on trust for the benefit of the beneficiaries. This makes the trustee the nominal owner of the assets.
- Many times, more than one trustee is assigned.
- There are also times when a trust has more than one settlor.
Fixed Trusts for Estate Planning
A fixed trust is a kind of living trust that's established for the purpose of estate planning. A fixed trust gives the settlor a way to control assets and money to be sure the trust's beneficiary benefits. A fixed trust's beneficiary gets property from the trust on a schedule the settlor establishes. The trustee gets little or no discretion in the distribution of the property that's tied up in the trust. The trustee can't change who the beneficiaries are or how much they are scheduled to get.
Life Interest Trusts
A life interest trust is the most-often used fixed trust. The terms of a life interest trust give one individual the right to all of income from the trust during that person's lifetime. When the beneficiary of a life interest trust dies, the remaining trust property is payable to the named capital beneficiaries of the trust.
Trusts can also be contingent on certain conditions being satisfied by the beneficiaries. Reaching a specific age is one common condition. When the condition indicated in the trust is achieved, the beneficiary usually has full interest in the property. Instead of a single beneficiary, multiple beneficiaries can be assigned by the settlor. The settlor can also assign either a fixed amount or percentage of the assets to each beneficiary.
- For example, the settlor could assign 70 percent of the trust to a spouse and 30 percent to a child, or the trust could be established to provide care for a handicapped child.
- The trustee has to distribute the predetermined amounts to the beneficiaries based on the terms established in the trust deed.
- The beneficiary or beneficiaries have a legal interest in the trust's assets, minus deducted sums the trustees pay in the course of administering the trust.
Discretionary trusts are similar to fixed trusts, but the settlor doesn't assign a fixed beneficiary or beneficiaries. The trust interest amounts of beneficiaries are not set by the settlor in a discretionary trust. With this type of trust, the trustee makes the decisions as to who the beneficiaries will be and how much they will get. Most discretionary trusts let the trustee choose the beneficiaries and amounts, but it's possible to set one up to let the trustee choose only one aspect of the trust.
The trustee has more flexibility to adjust terms of the trust to changed circumstances with a discretionary trust that's been carefully drafted. This extends to adding beneficiaries and excluding them. The beneficiaries can't force the trustee to do anything to their benefit, and that's what makes it discretionary. The trustee can deny or provide the trust's benefits at will.
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