Settlor’s Choice: Fixed vs Discretionary Trusts


By: HeirSearch.

Trusts are estate-planning tools that determine how an estate’s assets are controlled, protected, and taxed. There are many different types of trusts, and trust agreements offer a variety of benefits for both the settlor and the beneficiary. When it comes to estate planning – depending on the desires of the settlors and the interest of the beneficiary – it’s important to measure what would be more advantageous to both parties – fixed or discretionary trusts?

What Is The Function of  Trusts?

A trust is a legal relationship formed when the settlor relinquishes control of their assets with the goal of providing for their beneficiaries. Before the beneficiary can receive what they are legally entitled to, the settlor’s assets are transferred to the trustee, becoming the property of the trustee until the beneficiary is of age to receive the assets. A trustee is thus the nominal owner of the settlor’s assets and it is the trustee’s duty to act in the best interest of the beneficiary. Often, more than one trustee is assigned to an estate.

What Are Fixed Trusts?

Fixed trusts allow the settlor to control the distribution of assets while keeping in mind the interest of the beneficiaries. Based on the specific schedule put in place by the settlor, the trust property is distributed to the beneficiaries. The trustee of a fixed trust has little to no discretion in determining who receives what portion of the benefits.

A fixed trust is an established form of living trust for estate planning. One of the most common types of fixed trusts is a life interest trust. During one’s lifetime, they have a right to all of the trust’s income. However, upon the death of the individual, the trust property transfers to named capital beneficiaries. For example, the settlor may grant 60% of the trust’s benefits to a partner and distribute 40% of the trust’s remaining benefits to their children.

Yet another type of fixed trust is contingent upon the beneficiaries satisfying certain conditions, such as reaching a particular age. As soon as the conditions are met, the beneficiaries typically receive an absolute interest in the capital. A fixed trust may also be established to distribute assets to a child with a disability, ensuring they receive proper care in case of loss of parents or guardians.

Benefits of Fixed Trusts

● Provides a fixed benefit or percentage for each beneficiary
● Specific percentage payment amounts are specified in the trust document
● Ensures less conflict and decreases the chance of altercations between beneficiaries and trustees
● The settlor may also choose multiple beneficiaries

What Are Discretionary Trusts?

Unlike fixed trusts, the settlor does not set fixed beneficiaries or trust interest amounts in a discretionary trust. Instead, the trustee has the power to decide which beneficiaries will benefit from the trust, giving the trustee greater flexibility to address changes in circumstances. This type of trust is often administered for a beneficiary who is a minor, in order to assist with their health, education, and support.

Discretionary trusts are commonly administered to protect the assets in case of bankruptcy. A creditor cannot repossess trust property in cases of bankruptcy or liquidation. Additionally, the trustee has the power to withhold distributions from a beneficiary who may be in financial duress, contemplating bankruptcy, or filing for a divorce.

Benefits of Discretionary Trusts

● Trustee can choose to pay a higher amount to certain beneficiaries
● A discretionary trust can protect assets from being misused
● They are more common than fixed trusts since most family trusts are discretionary
● Trust property is exempt from creditors

Depending on the needs and desires of the settlor, an estate plan can contain one or more trust agreements. Knowing which type of trust is best may require assistance from estate planning attorneys who can help identify estate goals and develop measures to protect the assets, the settlor, and their beneficiaries.

Do You Need Help Locating Beneficiaries?

At HeirSearch, we’ve seen it all. If you are the trustee and need to find the beneficiaries to a trust, HeirSearch can help. We offer no-cost, no-obligation consultations, even if you are not planning to start a search right away.

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