Protective trust
Encyclopedia
The Protective Trust is a form of settlement found in England and Wales
and several Commonwealth
countries. It has marked similarities to asset-protection trusts found in several offshore jurisdictions and US Spendthrift trust
s.
In such a trust assets are ordinarily held to pay an income to the beneficiary
. The beneficiary may also have access to capital of the trust with the trustee
's permission. The right to receive income from a trust would ordinarily be an asset in the hands of the beneficiary and could be sold, thwarting the intention of the donor to spread the gift over the recipient's lifetime. Additionally on a bankruptcy the right to the income would be sold by the beneficiary's trustee in bankruptcy.
To give protection to beneficiaries, a protective trust automatically converts into a discretionary trust
, under which the beneficiary has no right to the income, if he or she does anything which breaches a condition specified in the document creating the trust.
The establishment of this discretionary trust is ordinarily exempt from the charge to UK inheritance tax on the establishment of discretionary trusts.
Such protective trusts have a longstanding history. To reduce the verbose definitions that had previously to be recited in the establishing documents of a protective trust, in England and Wales s33 of the Trustee Act 1925 (and equivalent legislation in other jurisdictions) provides that this protection will arise in any trust described as a "protective trust" in its trust deed.
Protective trusts are subject to challenge under creditor protection legislation as are any other forms of asset-protection. However many jurisdictions do not permit a trust to be broken where a debtor who remains a discretionary beneficiary only under a trust and cannot access the fund without the exercise of the trustees' discretion in his favour.
England and Wales
England and Wales is a jurisdiction within the United Kingdom. It consists of England and Wales, two of the four countries of the United Kingdom...
and several Commonwealth
Commonwealth of Nations
The Commonwealth of Nations, normally referred to as the Commonwealth and formerly known as the British Commonwealth, is an intergovernmental organisation of fifty-four independent member states...
countries. It has marked similarities to asset-protection trusts found in several offshore jurisdictions and US Spendthrift trust
Spendthrift trust
A spendthrift trust is a trust that is created for the benefit of a person that gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary...
s.
In such a trust assets are ordinarily held to pay an income to the beneficiary
Beneficiary (trust)
In trust law, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person, but it is perfectly possible to have a company as the beneficiary of a trust, and this often...
. The beneficiary may also have access to capital of the trust with the trustee
Trustee
Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
's permission. The right to receive income from a trust would ordinarily be an asset in the hands of the beneficiary and could be sold, thwarting the intention of the donor to spread the gift over the recipient's lifetime. Additionally on a bankruptcy the right to the income would be sold by the beneficiary's trustee in bankruptcy.
To give protection to beneficiaries, a protective trust automatically converts into a discretionary trust
Discretionary trust
In British and Canadian law, a discretionary trust is a trust where the beneficiaries and/or their entitlements to the trust fund are not fixed, but are determined by the criteria set out in the trust instrument by the settlor. It is sometimes referred to as a family trust in Australia...
, under which the beneficiary has no right to the income, if he or she does anything which breaches a condition specified in the document creating the trust.
The establishment of this discretionary trust is ordinarily exempt from the charge to UK inheritance tax on the establishment of discretionary trusts.
Such protective trusts have a longstanding history. To reduce the verbose definitions that had previously to be recited in the establishing documents of a protective trust, in England and Wales s33 of the Trustee Act 1925 (and equivalent legislation in other jurisdictions) provides that this protection will arise in any trust described as a "protective trust" in its trust deed.
Protective trusts are subject to challenge under creditor protection legislation as are any other forms of asset-protection. However many jurisdictions do not permit a trust to be broken where a debtor who remains a discretionary beneficiary only under a trust and cannot access the fund without the exercise of the trustees' discretion in his favour.