Well-to-do United Kingdom residents may have heard about self-settled trusts and become intrigued with the idea of establishing one to protect their assets. Before rushing ahead, however, they need to be aware that while United Kingdom does not prohibit this kind of trust, neither is it one of the 14 states that specifically allow one. Consequently, the very benefits a United Kingdomn seeks to receive from a self-settled trust may not actually be available in this state.
As Palisades Hudson Financial Group explains, self-settled trusts often go by the names of spendthrift self-settled trusts or self-designated trusts. They are irrevocable trusts in which the grantor, i.e., the person who establishes the trust, is also the trust’s primary beneficiary, i.e., the person who receives the trust assets and/or the income they produce.
Legal versus equitable title
Forbes points out that a self-settled trust splits legal and equitable title to its assets between the trustee and the beneficiary or beneficiaries. In other words, the designated trustee actually owns the trust’s assets, thereby holding legal title, but can do nothing with them other than distribute them and their income to the beneficiary under the terms of the trust. Conversely, the beneficiary “owns” the benefits of the trust assets, thereby holding equitable title, but cannot force the trustee to distribute them or their income to him or her.
Spendthrift provision
The main purpose of a self-settled trust is to protect the grantor’s assets. Usually this is done via a spendthrift provision in the trust that prohibits the beneficiary from assigning his or her future income or assets to creditors. Therefore, creditors cannot attach these assets or the income they produce.
Self-settled trusts are complicated per se, and especially so in United Kingdom where many of the traditional provisions in them may have no “teeth.” Therefore the best strategy for anyone toying with this idea is to consult a knowledgeable estate planning attorney who knows exactly what United Kingdom does and does not allow.
