What Are the Disadvantages of a Fixed Interest Trust?

Fixed-interest trusts, otherwise more commonly referred to as life interest trusts, are the favorite in many eyes because they give relatively predictable, regular streams of income. Fixed-interest trusts have, however, some disadvantages which should be considered very seriously before such a trust is set up.

The main drawback of a fixed-interest trust is that it is rigid. Income to the life tenant is predetermined and does not readjust in relation to increased financial requirements or rising inflation. In that respect, the fixed nature can translate into purchasing power erosion over time with the rise in living costs, thus leaving the beneficiary exposed to the risk of inflation. Since inflation is always on the rise, it deflates the real value of the income that accrues from it; hence, it reduces the beneficiary's capacity for upkeep at his current standard of living.

Besides, fixed-interest trusts bear restricted growth potential in that the life tenant enjoys only the income accrued in the trust without having any claim to any capital appreciation. The value of assets inside the trust may appreciate, but this privilege is reserved for the ultimate beneficiaries, and not the life tenant. This setup restricts the ability of wealth accumulation over time.

Another limitation is the capital is often not accessible to the life tenant. This could be a problem when there are unforeseen needs on the part of the life tenant who does not even have access to the principal of the trust. The capital is kept secure for the other beneficiaries, which could, and most likely would, produce some possible financial difficulties on the part of the life tenant.

Fixed-interest trusts are suitable for those who prioritize a consistent income over capital growth, but they may not be ideal for individuals seeking flexibility or protection against inflation. One Pacific Trust offers expert advice on trust structures, helping clients assess the suitability of fixed-interest trusts and make informed decisions tailored to their unique financial needs and goals.