What is the difference between a fixed and a discretionary trust?

There are two types of trusts: a fixed trust and a discretionary trust. However, the benefits accruing from these trusts differ significantly in how they are distributed to the beneficiaries and in terms of the trustees' control. A fixed trust is distinct in the following ways. At One Pacific Trust, we are committed to helping you navigate these differences, ensuring that you choose the right trust structure to meet your specific needs:

1. Fixed Trust:

• Beneficiary Entitlements: Fixed beneficiaries have fixed, predetermined interests in the income and capital of the particular trust. This presupposes that the trust deed should provide for precisely what each beneficiary is entitled to receive.
• Trustee's Responsibility: No discretion to trustee as to 'how' the income or capital is distributed; he must do what is said in the trust deed.
• Certainty of Beneficiaries: The beneficiaries are certain about what they will get from the trust. Their share is specified and can in no way change due to the trustee.
• Common Use: Fixed trusts find applications many at times in family or estate planning where the settlor may like to ensure that specific persons get specific amounts or rates of the trust assets.

2. Discretionary Trust:

• Beneficiary Entitlements: No fixed entitlements of the beneficiaries to the income or capital of the trust accrue in the discretionary trust. The discretion lies with the trustee regarding the amount of entitlement to each beneficiary and the time at which it is received.
• Trustee's Role: Wide latitude of control and flexibility is enjoyed by the trustee in deciding which of the beneficiaries will benefit, to what extent, at what time, based on the criteria or guidelines that the settlor may have outlined.
• Uncertainty: Beneficiaries do not have a guaranteed share of the trust’s assets and may receive different amounts at different times, or potentially nothing at all, depending on the trustee’s decisions.
• Common Use: The discretionary trusts are set up for asset protection, tax planning, and situations where flexibility is needed in responding to changing circumstances, like varying the distribution based on the needs of the beneficiaries, their financial situation, or tax considerations.

Key Differences:

• Control: In a fixed trust, the control is limited, and distributions are determined by the trust deed. In a discretionary trust, the trustee has significant control and can make decisions about distributions based on the best interests of the beneficiaries or the intent of the trust.
• Flexibility: Discretionary trusts are much more flexible, allowing the trustee to adapt distributions to changing circumstances. Fixed trusts are rigid, with predetermined distributions that cannot be altered by the trustee.
• Certainty for Beneficiaries: Beneficiaries of a fixed trust have certainty regarding their entitlements, whereas beneficiaries of a discretionary trust do not know in advance what, if anything, they will receive.
• Purpose: A fixed trust applies in situations where definite results are required with some particular rights and interests pre-defined, such as estate-planning applications or in particular estate-planning applications. A discretionary trust will apply where flexibility is required, possibly including asset protection and tax planning.

Each of these types of trusts can, in fact, be established for the realization of different purposes in articulation with specific needs and objectives both of the settlor and the beneficiaries.