Legal Definitions - Self-settled trust

A self-settled trust is a specialized legal arrangement where an individual creates a trust and also names themselves as the primary beneficiary who will receive benefits from the trust's assets. While the person creating the trust (often called the "settlor" or "grantor") is also the one who benefits from it, the assets placed into the trust are managed by an independent trustee. This type of trust is primarily used for asset protection, as it aims to shield the assets within the trust from the reach of most future creditors of the beneficiary. It is sometimes referred to as a spendthrift trust and is only permitted in a limited number of U.S. states. The extent to which these assets are truly protected from creditors or tax obligations can vary significantly depending on state laws and specific court rulings.

• Example 1: Protecting Business Assets

  Imagine Sarah, a successful entrepreneur who owns several high-risk businesses. She is concerned about potential future lawsuits or business debts that could arise and threaten her personal wealth. To protect a portion of her assets, such as her investment portfolio and vacation home, she establishes a self-settled trust. Sarah places these assets into the trust, names herself as the beneficiary, and appoints a professional trust company as the trustee.

  How this illustrates the term: Sarah is both the creator (settlor) and the beneficiary of the trust. By transferring her assets into this trust, she aims to insulate them from future business creditors, even though she still benefits from the assets held within it. The trust company, as the independent trustee, manages these assets according to the trust's terms.

• Example 2: Professional Liability Protection

  Dr. Ben, a highly respected surgeon, wants to ensure that his family's financial security is not jeopardized by a potential future malpractice claim, despite having robust insurance. He decides to create a self-settled trust, funding it with a significant portion of his personal savings and real estate. He names himself as the beneficiary, allowing him to receive income or distributions from the trust for his living expenses, and appoints his sister, a financially savvy individual, as the trustee.

  How this illustrates the term: Dr. Ben established the trust and is the person who will benefit from its assets. The trust structure is designed to protect these assets from future creditors, such as those arising from a malpractice lawsuit, by placing them under the control of his sister as trustee, separate from his direct personal ownership.

• Example 3: Planning for Future Care Needs

  Consider Mark, who is nearing retirement and wants to ensure he has funds available for potential long-term care needs in the future, without those funds being immediately accessible to general creditors or subject to certain government benefit eligibility rules if he were to need them. He sets up a self-settled trust, transferring a substantial sum of money into it. Mark designates himself as the beneficiary, allowing for distributions to cover his future care costs, and appoints a trusted financial advisor as the trustee to manage the investments and disburse funds as needed.

  How this illustrates the term: Mark created the trust and is the sole beneficiary who will receive distributions from it. The purpose is to protect these specific funds from other potential creditors while still ensuring they are available for his own future needs, managed by the independent trustee.