Many clients believe that merely using a trust for their property will provide optimum asset protection for their beneficiaries. This is not always the case. The level of protection for trust beneficiaries depends on the language in the trust agreement.
The level of asset protection depends on whether the trust is either
- a mandatory distribution trust;
- a support trust (for example, using ascertainable standards for “health, education, maintenance and support”);
- a fully discretionary trust; or
- a hybrid trust.
A fully discretionary trust gives the trustee absolute discretion over whether, when, and how much a distribution should be to a beneficiary. This type of trust provides for the trust property. The reason is the courts generally have concluded that a beneficiary of a fully discretionary trust has no “property interest” in the trust and not right or power to compel the trustee to make distributions. A creditor or claimant generally cannot attach the assets or income of a discretionary trust to satisfy a claim against a beneficiary.