Senior Associate Oliver Embley answers all your questions.
A protective trust is designed to protect a beneficiary from claims by creditors. Often a beneficiary will have a life interest in trust assets, i.e. an automatic right to trust income and to live in any property owned by the trust. If it is a protective trust and the beneficiary becomes bankrupt or attempts to assign their interest to creditors, that interest will automatically terminate and the trust will become discretionary; the beneficiary will remain within the class of beneficiaries so can still benefit from income/capital but only at the trustees’ discretion.
If you wish to make provision for family members and have concerns about possible financial impecunity, a protective trust may be the solution. If a beneficiary is made bankrupt, their trustee in bankruptcy should not be able to claim their income from the trust because that income will automatically cease. The capital of the trust will also be protected as it belongs to the trustees and not the beneficiary.
As with all trusts, an individual is only able to settle £325,000 of capital (£650,000 for spouses/civil partners) without giving rise to an upfront Inheritance Tax charge and there may also be Inheritance Tax charges every ten years and when capital leaves the trust. Furthermore, if the trust is set up with the intention of putting assets out of the reach of creditors it may be successfully challenged by a trustee in bankruptcy. It is therefore sensible to settle a protective trust when a beneficiary is not in any actual financial difficulty.