Beneficiary as Trustee of Trust: Is Protection Lost?

An attorney asked me about a situation where a parent sets up a trust for the benefit of an adult child and makes the child the trustee of the trust. The trust has typical “spendthrift” provisions which protect the beneficial interest of a trust from the creditors of the trust beneficiary. The attorney inquired whether the spendthrift protection offered by the trust is lost where the beneficiary (child) controls trust assets in his position of trustee.

I found one bankruptcy court decision which supported my colleague’s position that the child’s (trustee”s) interest would not be protected from creditors. In this case, the judge said:

“Florida law generally recognizes the validity of spendthrift clauses and will allow them against the valid claims of creditors. However, where a beneficiary has the power to control the plan’s assets, this dominion over the property is such that the interest is not exempt from claims for payment of debts.” 81 B.R. 681.

This is the only judicial opinion supporting this position. I believe the case is isolated and unsupported by any other law. Nevertheless, my trusts usually include an instruction that a child acting as trustee of his own trust share must appoint an independent co-trustee who must be an attorney, CPA, or financial institution. The requirement of an independent co-trustee makes sure that the beneficiary never has total control over their trust property and ensures spendthrift protection against the child’s creditors.