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Understanding Fixed and Discretionary Trusts

Trust agreements offer a variety of benefits for both the settlor and the beneficiary. However, there are many different types of trusts. Knowing which type of trust is best for your situation may require assistance from a California estate planning attorney. For example, would you and your beneficiaries gain more advantage from fixed or discretionary trusts?

Fixed Trusts vs. Discretionary Trusts

Many people are familiar with the terms “revocable” and “irrevocable” when discussing trusts. You may not be familiar with the terms “fixed” and “discretionary” trusts as they relate to agreements. However, these two terms are very important because they control how much flexibility your trustee has when distributing funds from your trust.

In a fixed trust, the person creating the trust schedules distributions to specific heirs in specific amounts. The trustee has no control over the schedule, the amounts, or the beneficiaries. The trustee’s job is to manage the assets within the trust as the trust dictates and make distributions according to the terms set by the trust. The person creating the trust has complete control of when and how distributions from the trust will be made and to whom distributions will be made. 

However, a discretionary trust, which is more common, gives the trustee the authority to make distributions according to the trustee’s discretion. The trustee can follow the terms outlined in the trust or the trustee can make changes to the distribution schedule and the amount of distributions.  A discretionary trust places the control of distributions in the hands of the trustee instead of the person creating the trust. 

Benefits of a Fixed Trust vs. Discretionary Trust

A fixed trust decreases the chance of arguments between beneficiaries and trustees because the terms of the trust cannot be changed. Beneficiaries will receive the money they are scheduled to receive under the terms of the trust. However, this means that some beneficiaries who may not need the funds may receive the same amount or more money than other beneficiaries who might have a substantial need for those funds.

With discretionary trusts, the trustee can choose to pay a higher amount to some beneficiaries than other beneficiaries. The trustee can withhold distributions from some beneficiaries for certain reasons. For example, a trustee may choose not to disburse funds to a beneficiary who may be contemplating bankruptcy or who may be filing for divorce. Because the beneficiaries have no interest in a discretionary trust that can be transferred or attached by creditors unless the trustee makes a distribution, a discretionary trust can protect those assets. 

Discretionary trusts are frequently administered for the “health, education, maintenance, and support” of the trust beneficiaries.  Often, a discretionary trust will remain in place until the beneficiary reaches a certain age, when some or all of the trust assets may be distributed outright.  Discretionary trusts are useful when providing for minor children after the death of a parent, or for special needs adults who need to protect government benefits by receiving distributions only for limited purposes. 

Contact a California Estate Planning Attorney for More Information

Your estate plan may contain one or more trust agreements, depending on your needs and desires. Contact us today for a consultation. Our California estate planning attorneys can help you identify your estate planning goals, discuss options for meeting those goals, and develop an estate plan that protects you, your assets, and your family.