Discretionary vs. Fixed Trust
Nov. 29, 2022
As we’ve explained in several prior newsletters, a trust is a legal relationship between three parties: the grantor, also called trustor or settlor, the trustee, and the beneficiary. The grantor is the person who creates and funds the trust. The trustee is the person who manages the trust property according to the terms of the trust agreement. The beneficiary is the person who benefits from the trust property.
There are two types of trusts: fixed trusts and discretionary trusts. A fixed trust has preset rules about how the trust property must be managed and distributed. A discretionary trust gives the trustee discretion over how to manage and distribute the trust property.
Fixed trusts are created for specific purposes, such as providing income for a particular period of time or funding a child’s education. Discretionary trusts are created for general purposes, such as providing financial support for a spouse or children during their lifetime. Discretionary and fixed trusts can present themselves in many trust types, such as living trusts, testamentary trusts, charitable trusts, and special needs trusts.
It is important to choose the right type of trust to protect your family and preserve your legacy. Funds from a fixed trust, such as an educational trust, must be used for that purpose, and may not take into account all the possibilities that the future may hold. A discretionary trust, which puts the power in the trustee’s hands to make distributions based on their judgement after evaluating present conditions, needs, and additional responsibilities, may be more beneficial in the long run as a general estate planning tool for the distribution of the majority of the assets of an estate.
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