Q: If a trust were drafted as, or could become a beneficiary-controlled trust, wouldn’t the assets in the trust be subject to attachment by creditors and/or a divorce degree?
It is my limited understanding that once a beneficiary has constructive receipt of the funds, these funds are to be attached. Unless, the beneficiary must defer to a higher authority – an exalted co-trustee. Excerpt from Nevada: The Crown Jewel of Trust States “Once the client understands that the trust can be drafted as a beneficiary-controlled trust, there is no reason to ever terminate the trust.”
A: Whether the trust assets are protected from the creditors of the beneficiaries should be broken down into two different types of Beneficiary Controlled Trusts: Support Trusts and Discretionary Trusts.
Support Trusts: A Support Trust is a third-party irrevocable trust that has a support standard for distributions, typically for the “health, education, maintenance and support” of the beneficiaries. The primary beneficiary is often both the investment trustee and the distribution trustee. Regardless of whether a beneficiary is the trustee, the trust assets are protected from the beneficiaries of the trust if the trust has a spendthrift provision, subject to certain exceptions depending upon the jurisdiction in which the trust is sitused. Many jurisdictions have exception creditors either by statute or by judicial creation. One that many jurisdictions have is divorcing spouses. If you use a support trust, make sure you select a jurisdiction (like Nevada) where there are no exception creditors.
Discretionary Trusts: A third-party irrevocable Discretionary Trust doesn’t have to rely on a spendthrift provision to protect its assets from the creditors of the beneficiaries. Other than an exception in Florida for divorcing spouses and child support creditors, a discretionary trust with an independent trustee, having sole and absolute discretion over distributions, is protected from all classes of creditors. We will generally draft a Discretionary Trust with the primary beneficiary as investment trustee and either a friend or a trust company as distribution trustee. This creates a Beneficiary Controlled Trust with the best level of creditor protection available. Even though you don’t have to situs this type of trust in Nevada to obtain these creditor protection benefits, I generally use a Nevada trust company co-trustee to use Nevada law in order to obtain other Nevada benefits, such as the Dynasty Trust availability, the state income tax savings and the flexible Decanting statutes. Also, you never know where the trustees will live from time to time, so in my opinion, it is prudent to use Nevada jurisdiction to avoid having to worry about the trustees moving to jurisdictions that have less protective and less flexible laws.