Fixed Interest And Discretionary Trusts

INTRODUCTION

One part of the trust deed will deal with the management of the trust property, and another will deal with the terms on which trust property can be paid out for the benefit of beneficiaries. These latter provisions are known as the dispositive provisions.

There are essentially two types of trust in this context, fixed interest trusts and discretionary trust.

FIXED INTEREST TRUSTS

This expression has nothing to do with bank interest, but refers to the rights or interests which the beneficiaries have in the trust property. The beneficiaries have some sort of fixed interest or set entitlement in the trust property. This can be an entitlement to income and/or capital. The most common type of fixed interest trust is a life interest trust, under the terms of which one individual will have a right to all of the income from the trust fund during his lifetime. On his death the trust property will generally be payable to named capital beneficiaries. Unless the trust deed specifies otherwise, the trustees of a life interest trust must balance the interests of the capital and income beneficiaries, and must bear this balance in mind when pursuing an investment policy.

Trust property can be held on fixed trusts for beneficiaries subject to (or contingent upon) them satisfying certain conditions. Again, the contingent interest can be in income and/or capital. For example, the beneficiaries could be defined as those of the settlor's children who reach the age of twenty five. Before the children reach the specified age the income and capital might be payable to them at the discretion of the trustees, or might be accumulated or paid to other beneficiaries, depending on the terms of the trust deed. On reaching the specified age the children will usually have an absolute interest in the capital.

DISCRETIONARY TRUSTS

The trustees of a discretionary trust will have power to pay income and/or capital to any one of a class of named beneficiaries at their discretion. They can create subtrusts for those beneficiaries, providing, for example, that a named individual should become entitled to a portion of the trust property on reaching a certain age. The trustees will often have power to accumulate the income if they do not wish to pay it out. In the Cayman Islands, income can be accumulated for so long as the trust is in existence. It is possible for the trustees to have power to add beneficiaries to the class of persons actually named in the deed. This will provide more flexibility by allowing people who may not have been thought of at the time the trust was set up to be added at a later stage.

The main advantage of this type of trust is flexibility. The relative interests of the various beneficiaries need not be decided at the outset. Another advantage is that none of the beneficiaries have an absolute entitlement to trust property, which is often useful in their home jurisdiction for tax and asset protection purposes. The disadvantage is that the settlor loses control of the destination of the trust property, since while the settlor can communicate his wishes regarding the ultimate destination of the funds to the trustees, the trustees have no obligation to follow those wishes, and may choose not to do so. As we have mentioned before, the settlor may revoke the trust in these circumstances, if the trust was made revocable to start with.

HYBRID TRUSTS

Trusts can take the form of a combination of fixed interest and discretionary elements. We call these trusts hybrid trusts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.