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.

Should I Include a No Contest Clause in My California Will or Trust?

By creating a will or trust, most people assume that their assets are secure, and that their property will be distributed according to their wishes when they die. Unfortunately, this isn’t always the case. Occasionally, disgruntled family members come forward to challenge the validity of a will or trust. In California, there are several reasons that someone may challenge a will or trust. The most common allegations include that:

  • The will or trust was not properly created or signed
  • The person who executed the will or trust lacked the capacity to do so
  • The person who executed the will or trust was induced to execute the document through fraud or undue influence

These grounds may be difficult for the contestant to prove in court.  But defending a will or trust contest can also be costly and time-consuming. One way to avoid this situation is the inclusion of a no contest clause in your will or trust. For more information on the advantages of including a no contest clause in your will or trust, please review the information below and contact an experienced estate planning attorney for assistance. 

How can a no contest clause help avoid will and trust contests?

A no contest clause discourages will and trust contests by preventing anyone who contests a will or trust without probable cause from receiving his or her inheritance.  Historically, no contest clauses discouraged many unhappy heirs and beneficiaries from filing a contest.

In 2010, however, California changed its no contest clause laws, which limited their effectiveness significantly. The changes to California’s no contest laws are retroactive, which means that they apply to all wills and trusts that became irrevocable after January 1, 2001. Under California’s current no contest law, there are only three situations in which a no contest clause shall be enforced:

  • When someone directly contests a will or trust without probable cause – that is, without possession of facts that might cause a reasonable person to file a contest.
  • When a creditor makes a claim and the no contest clause specifically prohibits creditor’s claims against the estate or trust assets.
  • When someone challenges a transfer of property and the non-contest clause specifically prohibits a challenge to a property transfer.  This section often applies when a surviving spouse asserts that a trust asset is community property and should pass to him or her under provisions of family law.  He or she still may proceed with that claim in court, but the court may also rule that the spouse has forfeited any other gift left to them under the will or trust.

About trust and probate litigation

When a beneficiary or family member is upset with the way in which trust or estate property is distributed, this often leads to trust or probate litigation, which can be a long and costly process. “Trust and probate litigation” or “trust and estate litigation” refers to the process by which an individual who has an interest in a trust or estate brings his or her disagreement to the court for resolution. However, trust and probate litigation can often be avoided through proper estate planning. And the best way to begin the estate planning process is to contact an experienced California estate planning attorney for assistance. 

Contact our will and trust contest attorneys today

As you can see, will and trust disputes among beneficiaries are common in California. And whether the distribution plan of a will or trust is called into question, an heir or beneficiary has been disinherited, or some other controversy emerges, anyone with a will or trust runs the risk that a family member will legally challenge the document’s validity in a will or trust contest. 

At Loew Law Group, PLC, our will contest attorneys and trust contest attorneys represent clients in will and trust contests throughout San Mateo County, including Belmont, Burlingame, Foster City, Hillsborough, and Redwood City. We leverage our knowledge as estate planners to represent personal representatives and beneficiaries when a will or trust is challenged. We also frequently represent heirs or beneficiaries who believe that they have been wrongfully disinherited.  

When you become our client, we will do everything in our power to ensure that your rights will be protected. If you are a personal representative, trustee, or beneficiary of a will or trust that has been challenged, we can help you defend the challenged instrument.  On the other hand, if you feel that your inheritance has been wrongfully taken from you, we analyze the situation and determine when it may benefit you to file a contest. Finally, if you simply want to make your will and trust as strong as possible to avoid future disputes, please contact us for a consultation