What Is a Self-Settled Trust

A self-settled trust, also known as a spendthrift trust, is a specialized trust type permitted in select states. These trusts allow the person creating the trust (the grantor) to also be a primary beneficiary. Within this structure, assets become permanently held by the trust and managed by an independent trustee, which can help limit exposure to most creditors.

This type of planning is often used by individuals in higher-risk professions, such as business owners, physicians, and attorneys, to help protect assets and support their families’ livelihoods in the event of future litigation. Furthermore, self-settled trusts can be structured as part of broader planning to help reduce the amount of assets exposed to federal estate taxes upon the grantor’s passing. Peak Trust Company can assist with ongoing administration and oversight based on the terms of the trust.

Talk with a Trust Expert to Understand More About Self-Settled Trusts

Self-Settled Trust vs Spendthrift Trust

These terms are often used interchangeably online, but they are not the same.

What is a spendthrift trust

A spendthrift trust is generally a trust that includes a spendthrift provision. This provision restricts a beneficiary from assigning or pledging their interest in the trust and can limit certain creditor claims against the beneficiary’s interest, depending on the facts and the applicable law.

A spendthrift trust is often created by someone for someone else, such as a parent establishing a trust for a child.

What is a self-settled spendthrift trust

A self-settled spendthrift trust is generally a trust where the grantor is also a permissible beneficiary and the trust includes spendthrift language. These structures are often discussed in asset protection planning and can involve additional legal and jurisdictional requirements.

In simple terms:

• A spendthrift trust is commonly used to protect a beneficiary’s interest from certain beneficiary creditors.
• A self-settled spendthrift trust raises additional questions because the grantor is also a beneficiary, and creditor rules may differ.

What a Self-Settled Trust Can Help With

People typically explore self-settled trusts for planning goals such as:

• Creating a long-term structure for asset administration and governance
• Reducing unnecessary exposure by separating trust ownership from personal ownership
• Establishing clearer rules around distributions and beneficiary protections
• Coordinating planning across generations

The two primary benefits of self-settled trusts are:

Asset Protection

The cornerstone of self-settled trusts is their spendthrift provision, which erects a formidable barrier when properly drafted. This provision shields trust assets from potential future creditors, including former spouses. This protection remains intact as long as the grantor does not face existing or foreseeable creditor claims at the trust’s inception. While trustees typically make distributions to grantor beneficiaries, they retain their independence and are not bound to do so. In certain jurisdictions like Alaska and Nevada, trust laws solidify creditor protection for self-settled trusts, granting the grantor a degree of control and disposition rights. Trustees may halt distributions at any time, as they may opt to do at times when beneficiaries are faced with some kind of creditor exposure.

Transfer Tax Liability Reduction

Self-settled trusts offer an avenue to maximize the lifetime gift tax exemption while ensuring financial security for the grantor’s long-term needs. In this scenario, the grantor assumes the role of a beneficiary, receiving periodic distributions directed by the independent trustee. Upon the grantor’s passing, all remaining assets seamlessly transition to other beneficiaries without being subject to additional estate taxes. This has two major advantages: (1) the current lifetime gift exemption is maximized, even if there is a reduction in the federal lifetime transfer tax exemption limits at some point in the future, and (2) future growth of trust assets will happen outside of the grantor’s estate and thus, not subject to further estate or transfer taxation upon the grantor’s passing.

Self-Settled Trust States and Spendthrift Statutes

Alaska and Nevada provide for self-settled trusts. Good spendthrift statutes generally allow the grantor to set up an irrevocable trust, be a discretionary beneficiary, and avoid having the assets be subject to creditor claims of either the grantor or another beneficiary.

Peak Trust Company is state-chartered in Alaska and Nevada, providing self-settled trust administration expertise pursuant to state laws.

Important Considerations for Self-Settled Spendthrift Trusts

While self-settled trusts offer compelling advantages, several crucial considerations merit attention:

Varied State Regulations

Fewer than one-third of U.S. states permit the establishment of self-settled trusts, and the regulatory landscape differs from state to state. Skilled legal counsel is crucial to ensure that the trust is properly drafted in the best state to achieve the goals of the grantor.

Choice of Trustee

The grantor must select a trustee residing in the state where the trust is created.

Limited Control

Grantors relinquish control over distribution decisions made by the independent trustee. This is a necessary component to ensure that the trust achieves the tax and creditor protection goals of the trust. If the grantor retains too much control over trust assets, it could be contended that the grantor still has access to those assets and, as such, causes those assets to be considered property of the grantor, which then runs the risk of being reached by creditors or returned to the grantor’s estate. Following the advice of skilled legal counsel in this regard is crucial.

Anti-Abuse Safeguards

Safeguards are in place to deter grantors from creating self-settled trusts with the intent of defrauding existing creditors. All top-tier trust jurisdictions have implemented safeguards in the law to prevent fraudulent transfers (fraudulent attempts to hide assets from pre-existing creditors).

Risk of Regulatory Scrutiny

Trust assets may be at risk if courts suspect the trust was established in anticipation of creditor claims. It is important to take the necessary steps when establishing a self-settled trust to demonstrate honest intent and ensure there is no danger of fraudulent transfer.

Legal Consequences

Courts often view trust transfers that lead to grantor insolvency unfavorably. Some states, such as Alaska, have minimum requirements in statute to prohibit insolvency when creating a self-settled trust.

How a Self-Settled Trust Works

While structures vary, most self-settled trust planning includes these components:

The grantor

The grantor creates and funds the trust. Once funded, the trust is typically intended to be irrevocable.

The trustee

The trustee administers the trust and carries out the trust’s terms. In many designs, the trustee has discretion over distributions.

The beneficiaries

The trust may benefit the grantor and often also includes other beneficiaries, such as a spouse, children, or future generations.

Trust terms and administration

The trust document defines how decisions are made, how distributions work, what restrictions apply, and how administration is handled over time.

FAQs About Self-Settled Trusts and Spendthrift Trusts

What is a self-settled trust?

A self-settled trust is a trust where the grantor who funds the trust may also be a permissible beneficiary, under the trust’s terms and the governing law.

What is a self-settled spendthrift trust?

A self-settled spendthrift trust generally refers to a self-settled trust that includes spendthrift language and is structured under a legal framework that addresses creditor and beneficiary issues.

What is a spendthrift trust?

A spendthrift trust is typically a trust that includes a spendthrift provision designed to restrict a beneficiary’s ability to assign their interest and may limit certain creditor claims against that beneficiary’s interest.

What is the difference between a spendthrift trust and a self-settled trust?

A spendthrift trust commonly refers to a trust created for a beneficiary with spendthrift restrictions. A self-settled trust refers to a structure where the grantor may also be a beneficiary. The creditor and legal considerations can differ significantly.

What is a self-settled trust used for?

Self-settled trusts are often discussed in long-term planning as a way to structure asset administration and governance, and in certain cases as part of broader risk management planning.

Have questions or would like more information? Our team is here to help.

Connect with a Trust Expert

Note: The information provided here is for general educational and informational purposes only. It is not legal advice and should not be interpreted as such. For a thorough understanding of these topics relevant to your specific circumstances, we recommend consulting a qualified estate planning attorney. Peak Trust Company cannot provide legal advice; however, we can serve as an informational resource and provide referrals to highly skilled attorneys who can offer legal and tax guidance tailored to your specific needs.