Protective trust

The law of wills and trusts
Part of the common law series
Inheritance
Intestacy  · Testator  · Probate
Power of appointment
Simultaneous death  · Slayer rule
Disclaimer of interest
Types of will
Holographic will  · Will contract
Living will
Joint wills and mutual wills
Parts of a will
Codicil  · Attestation clause
Incorporation by reference
Residuary clause
Problems of property disposition
Lapse and anti-lapse
Ademption  · Abatement
Acts of independent significance
Elective share  · Pretermitted heir
Contesting a will
Testamentary capacity  · Undue influence
Types of Trusts
Express trust  · Asset-protection trust
Protective trust  · Spendthrift trust
Charitable trust  · Honorary trust
Resulting trust  · Constructive trust
Special Needs trust
Doctrines governing trusts
Pour-over will  · Cy pres doctrine
Other areas of the common law
Contract law  · Tort law  · Property law
Criminal law  · Evidence

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 trusts.

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:

the beneficiary becomes bankrupt; or

the beneficiary sells the right to the income stream.

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 Law of Property 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.