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What Are Fixed and Discretionary Trusts?

Long Term Care Planning

Two of the main types of trusts are fixed and discretionary trusts. Both trusts can be used to provide tax relief and prevent resources from going through probate. Yet how they are managed differs. A fixed trust identifies the beneficiaries and how the assets should be distributed. A discretionary trust offers the trustee the option of choosing beneficiaries and what each one should receive.

A fixed trust is designed to provide money or assets to beneficiaries according to a schedule. This type of trust must be managed by the trustee specifically as designated by the creator of the trust, also known as the settlor. The trustee cannot change beneficiaries or the assets each one should receive. Think of a fixed trust as an instrument to distribute assets at set times and in fixed amounts to specific beneficiaries. The trustee carries out the wishes of the settlor as identified in the trust.

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A fixed trust is useful when the settlor cannot find a trustee and chooses to use a financial institution instead. This type of trust limits the disagreements within a family as the percentage each beneficiary will receive from the trust is clearly stated. With this type of trust, regardless of need or hardship, a beneficiary receives only what was designated for him or her. A wealthy family member may receive considerably more than another less financially stable family member based upon a decision made decades ago, and the trustee is powerless to change what each one gets.

A discretionary trust operates a bit differently and is used more often than a fixed trust. A trustee can use his or her discretion in managing the trust. This can mean the trustee can determine what beneficiaries will receive funds and when these funds will be available. It is important to note with a discretionary trust, the trustee may have the authority to pick and choose beneficiaries based upon circumstances. However, the trustee must manage the trust according to the wishes of the settlor.

The discretionary trust is also commonly used to make sure family assets are not part of divorce settlements as the trustee can make changes to beneficiaries and distributions as needed to protect the trust’s assets. While a trust cannot be created to hide assets from creditors, in the event a beneficiary needs protection from creditors after a trust is established, this type of trust can offer the trustee the ability to shield assets. In addition, this type of trust can help with managing the assets for young beneficiaries as the trustee has the option of exercising control to protect the funds should a young beneficiary lack the ability to manage assets effectively.

Choosing a fixed or discretionary trust, or some hybrid thereof, in estate planning requires deciding on the authority the settlor wants the trustee to have in managing the trust and distributing assets to beneficiaries.

If you have questions about how to safeguard your assets and your family through trusts, contact the experienced estate planning lawyers at Bratton Law Group today.

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