What Is a Hybrid Trust?
A trust is a legal document used in estate planning to outline how assets from a grantor's estate will pass to its beneficiaries. By having a trust, the estate will avoid probate which helps save costs in settling the estate. Trusts can be either fixed or discretionary with a hybrid trust being a combination of the two. These trusts are executed after death by a trustee and the beneficiaries have no decision-making power as to how assets will be disbursed.
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Defintion
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A hybrid trust combines the features of a fixed trust and a discretionary trust. It allows an grantor to properly pass down the estate and establish that certain assets will go to specific beneficiaries while leaving the remainder of the estate, however big or small, at the discretion of the trustee/executor to distribute. The trustee may also have discretion over how the assets in the trust will be invested or managed should they not be immediately disbursed. The trustee may also decide on what is being dispersed: income or capital distributions.
Fixed Trust
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When most people think of estate planning and creating a trust, they automatically assume that every asset within an estate will be itemized so that they can be disbursed in the execution of the trust after death. This is the case for fixed trusts where an inventory of assets is completed and each asset assigned to a beneficiary (or percentages assigned in cash and investment holdings). Fixed trusts don't require the trustee to make any major decisions.
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Discretionary Trust
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A discretionary trust is one that outlines who the beneficiaries are and the assets that should be assigned into the trust but doesn't specify how the assets are to be disbursed upon execution. It serves to avoid probate court and set forth other estate planning needs such as life insurance. But it gives the trustee the discretion on how the trust will be executed. A trust can have limited or express discretion. For example, limited discretion in a trust would state the the children get equal shares but not state how the assets should be divided. So one might get the house while the other gets the stock portfolio so long as they were equal in value.
Benefits
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There are several benefits to a hybrid trust. One is the estate planning component that avoids probate. By doing this, costs can be saved in the execution of the trust leaving more for the beneficiaries. A hybrid trust can reduce 50 percent capital gains tax relief on assets depending on how it is executed. It also names the beneficiaries and gives a starting point for the trustee on how assets will be disbursed. A hybrid trust usually lists the large items while leaving the smaller personal assets at the discretion of the trustee who can speak with beneficiaries to see determine their desire for any one discretionary asset.
Disadvantages
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The disadvantage of a hybrid trust is the likelihood of forgetting to list an asset as for fixed execution can create a lot of arguing among heirs. Additionally, if they are not correctly established and run, a hybrid trust can lead to tax consequences, an audit and penalties. If they aren't done right, the grantor may be putting the assets at more risk than not having a trust at all.
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