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Also known as a fixed income trust, a fixed interest trust is a type of trust arrangement that includes specific instructions in how disbursements are made from the proceeds contained in the fund. With this arrangement, the trustees do not have any type of discretion when it comes to how to disburse funds to the beneficiaries. While there are several benefits associated with a fixed interest trust, there are also some potential drawbacks that should be considered.
One of the chief advantages of a fixed interest trust is that beneficiaries know exactly what type of financial benefit will be received from the trust, based on the provisions put in place by the originator of the fund. This makes it much easier to plan in advance, and determine how to use the proceeds to best advantage. For example, if the goal of the trust was to provide a steady income to beneficiaries that can be used to manage basic living needs like rent, utilities, and food, those beneficiaries can depend on receiving a certain amount each disbursement period and arrange their home budgets accordingly.
The fixed interest trust also provides relative ease of management for trustees. This includes being able to project the disbursements from the fund without allowing for much in the way of variables. Doing so simplifies the task of comparing the anticipated income that will be generated by the trust during the same period, allow for the disbursements, and have some idea if the balance of the trust will actually grow, remain more or less the same, or likely decrease within a given calendar year.
While there are situations in which a fixed interest trust is a sound approach to providing for loved ones, there are a few possible drawbacks to consider. Since trustees have no real discretion in terms of changing the amount of disbursements or granting disbursements for certain events, this means that even if someone is the recipient of a trust fund, the chances of being able to draw on the fund in the event of a sudden illness, a job loss, or some other life crisis does not exist. In addition, the trustees will not be in a position to possibly limit disbursements as a means of preventing the balance from being used irresponsibly. Before deciding that a fixed interest trust is the most appropriate course, care should be taken to consider all possible future events that could occur with the beneficiaries, weigh the pros and cons of placing this level of restriction on the function of the trustees, then structure the trust fund in whatever manner is likely to reflect the intentions of the founder of the trust.