Discretionary Trusts vs. Fixed-Interest Trusts in Ontario: What's the Difference?

When a trust names a beneficiary, that doesn't automatically tell you how much they'll actually receive, or when. The answer depends on whether the trust is discretionary or fixed-interest — two fundamentally different ways of structuring who gets what, and one of the more consequential choices in designing a trust.

Neither approach is universally better. The right one depends on who the beneficiary is, what you're trying to protect, and how much flexibility the trustee needs.

Fixed-Interest Trusts: A Defined, Vested Entitlement

In a fixed-interest trust, each beneficiary's share or interest is spelled out in the trust document itself — a set percentage of income, a specific dollar formula, or a life interest in a particular property with the remainder passing to someone else later. The trustee's job here is largely administrative: follow the formula the document sets out, rather than decide how much anyone receives.

Discretionary Trusts: The Trustee Decides

In a discretionary trust, the trustee is given genuine discretion over whether, when, and how much each beneficiary within a defined class actually receives. No individual beneficiary has a guaranteed, vested right to a specific amount until the trustee actually exercises that discretion and pays it out.

Why Discretion Matters for Government Benefits

This distinction becomes especially important when a beneficiary receives means-tested government disability benefits. A fully discretionary trust, often called a Henson-type trust, is a widely used estate-planning tool in exactly this situation, because the beneficiary has no fixed, vested entitlement the trustee is obliged to pay out. The specific eligibility rules for any given benefit program are set by that program, not the trust, so it's worth confirming the details apply as expected to your beneficiary's specific benefits before relying on this structure.

Creditor and Family Law Exposure

Because a fixed interest is a defined, vested right, it can be more exposed to a beneficiary's own creditors, or become relevant in that beneficiary's own family law matters, than an interest the beneficiary has no ability to compel payment of. A discretionary interest, where nothing is owed until the trustee decides to pay it, generally offers more protection in this respect, though the details always depend on the specific facts and the exact wording of the trust.

Reporting and Administration Differences

A discretionary trust typically requires more ongoing involvement from the trustee: each distribution decision generally needs to be genuinely considered and properly documented, often through written resolutions, so the trustee can show the discretion was actually exercised rather than simply assumed. A fixed-interest trust mostly just executes the formula the document already sets out, with less ongoing judgment required. That difference tends to show up in the trustee's own time commitment and, indirectly, in the trust's ongoing administration costs — a trustee weighing repeated discretionary decisions is doing more work than one following a fixed schedule.

Choosing a Trustee Who Can Handle the Role

The two structures also call for different trustee skill sets. A fixed-interest trust can often be handled by a trustee comfortable with straightforward recordkeeping, since the formula does most of the work. A discretionary trust asks more of whoever holds the role — they need to be comfortable exercising independent judgment, documenting their reasoning, and standing behind decisions that some beneficiaries may not like. Naming a professional or corporate trustee, rather than a family member, is worth considering where the discretionary decisions are likely to be complex or contentious.

Which One Fits Your Situation?

Frequently asked questions