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LIFETIME PROTECTIVE TRUSTS:
WHAT ARE THEY? WHY SHOULD YOU CARE?

A Lifetime Protective Trust (or a Beneficiary Controlled Trust) is a trust which one creates today for the benefit of another to take effect either during the creator's lifetime or upon the creator's death.

This Trust is for clients who want a balance between asset protection and a desire that their beneficiaries be in control of the trust property. These trusts, if properly drafted, can give the beneficiary significant control over the trust, but not so much control that the beneficiary loses the trust benefits, as follows:

Increased Protection from Creditors

  • The trust provides that the beneficiary can use trust assets for his or her benefit and not for the benefit of their creditors
  • The laws of California prohibit the creation of self-settled asset protection trusts. Thus, your beneficiaries will not be able to protect these assets themselves without your help.
  • Even though creditors may be able to attach assets distributed from the trust to the beneficiary, the existence of the trust can make a beneficiary a less attractive target in lawsuits and other creditor actions.

If asset protection should become an issue (i.e., the beneficiary becomes the target of a lawsuit), the beneficiary would resign as Trustee and a successor trustee (preferably, an independent trustee or corporate fiduciary) would step in to serve in his or her place.

Weaker Spousal Claims at Death or Divorce

  • The trust is designed to make it harder for a spouse to claim trust assets in the event of the beneficiary's death or divorce.
  • This trust does not usually provide any protection against claims for child support and some claims for alimony.

The Trust Assets Are Separate From Beneficiary's Assets

  • The beneficiary should consider leaving assets in the trust for as long as possible. For example, rather than taking funds from the trust to purchase a residence, consider having the trust purchase the residence.
  • Once assets leave the trust, they lose the protection the trust afforded them.

The Trust is Controlled by the Trustee (i.e. the Beneficiary)

  • A beneficiary can serve as sole trustee upon attaining a stated age (typically, 30 or 35 years).
  • The Trustee controls the investments and distributions of the trust.

Caution: Not all Lifetime Protective Trusts are created equal.

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