Can a Trustee Be a Beneficiary of an Asset Protection Trust?

October 6, 2023
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8 min read

For your asset protection trust to be as defensive and airtight as possible, you have to appoint the right trustee. After all, your trust’s trustee will have ultimate power over the assets within the trust, the trust’s management, and other key decisions.

Normally, you might default to having a neutral third party, like a law firm or lawyer, be the trustee for your asset protection trust. But maybe you wonder whether a trustee can be a beneficiary of your asset protection trust. This is never a good idea, but let’s dive deeper to determine why.

Asset Protection Trusts and Key Roles

An asset protection trust is a resilient fiduciary arrangement where you transfer ownership of assets, like liquid capital or real estate, to the ownership of another third party called the trustee. An asset protection trust has the following major players:

  • You, the grantor. You determine who the trustee is and who any beneficiaries are
  • The trustee, who oversees the trust and handles distributions. The trustee is also responsible for ensuring that your trust is managed according to your original intent for years in the future. With an irrevocable (unchangeable) asset protection trust, this is even more important
  • Beneficiaries, who include any individuals or companies that receive distributions or assets from the trust

In essence, the trustee is the overall ruler of the trust. They can’t decide how the trust is run – that’s outlined in the trust’s original documents – but they’re still responsible for the trust and everything stored within.

Can You Appoint a Beneficiary as a Trustee for an Asset Protection Trust?

Technically, you can appoint a beneficiary to be the trustee for your asset protection trust. If you do this, your trust will become a “beneficiary controlled trust,” as one or more beneficiaries will control the trust and its distributions.

For example, imagine that you set up an asset protection trust for the benefit of your grandchildren. You want the trust to provide distributions to those grandchildren for the next 20 years. To make sure your grandkids get what they deserve out of your estate, you appoint the eldest grandchild to be the trustee.

Under this setup, the eldest grandchild is both the trustee and a beneficiary of the trust vehicle. This is a bad idea if you are a high-net-worth individual, like a business owner or doctor.

Note, of course, that whether or not this is specifically true for your asset protection trust depends on its jurisdiction. Some countries or jurisdictions may have different rules regarding irrevocable asset protection trusts and may prohibit this practice. If you have questions, you can and should ask your legal advisers (although they will tell you it’s not wise).

Should You Appoint a Beneficiary as a Trustee for an Asset Protection Trust?

No. Never, in fact!

When you appoint a beneficiary to be the trustee for your asset protection trust, you break the system of neutrality or non-ownership that trusts use to be legally defensible in court and in the face of creditor claims.

Normally, an asset protection trust works like this:

  • You place valuable assets, like liquid capital or property, in an asset protection trust
  • If you are sued and forced to pay damages or a creditor comes after you for a debt you owe, they may demand the assets in your asset protection trust
  • But since you don’t own the assets in the trust – the trust owns them, and the trustee oversees the trust – you have no legal obligation or ability to do that. Thus, the assets within the trust are safe
  • If your trust is offshore, it’s also safe from court orders that might force the adjustment of the trust or the compromising of its assets

The system only works if the trustee is under no obligation to abide by court rules. If a beneficiary were to become the trustee, a court could:

  • Notice that the beneficiary receives distributions from the trust and controls those distributions
  • Force the beneficiary to make distributions for the purposes of debt repayment, lawsuit damage payments, and so on

As you can see, making your beneficiary the trustee of your asset protection trust is a bad idea. 

While it's theoretically true that if your trust is set up in an offshore jurisdiction, a court will still have no legal grounds to demand the beneficiary/trustee access the assets within, it's also possible that a court could get around this one way or another.

For example, if the beneficiary of your asset protection trust is a US citizen and they are the trustee of an offshore asset protection trust, they could still be subject to US court rules and demands. 

It may not matter that the trust itself is set up in a different country than the US; all that matters to the courts is that the administrator of the trust is a US citizen.

Possible Consequences of Having Your Trustee Be a Beneficiary

If your trustee is also a beneficiary of an asset protection trust, you could see several dire consequences very quickly.

For starters, your asset protection trust won't be nearly as legally protective as it would be with a better trustee at the helm. It doesn't matter whether you or another beneficiary is the trustee; any setup of this nature negates a lot of the protective power of this vehicle.

But with a neutral third party acting as the trustee, the court has no grounds to claim that the trustee receives money from the trust (aside from the regular fee needed for trust maintenance/administration) and thus is subject to US court jurisdiction.

Even setting aside legal or creditor-related threats, it’s not a good idea to have your trustee also be a beneficiary. It creates a conflict of interest.

Say that you set up an asset protection trust for estate management purposes. You want to make sure your wealth is maintained for several generations for grandchildren, great-grandchildren, etc.

If you appoint one of your beneficiaries to be the trustee for your asset protection trust, they could potentially find a way to modify the trust or give themselves extra distributions. Remember, they are the ones in control.

If they are motivated enough, it’s possible that they could compromise your trust or use it in a way other than what you originally intended. With a neutral third party, like a law firm you hire to manage your trust, acting as the trustee, you don’t need to worry about this.

Who Should Be the Trustee of Your Asset Protection Trust?

Ideally, your asset protection trust should be managed by a neutral third party like a trust lawyer. When you work with Dominion, one of our reputable, trustworthy legal experts will act as the trustee for your asset protection trust. You don’t have to look elsewhere to get everything you need for your asset protection strategy.

Indeed, we have the full range of infrastructure and experienced personnel necessary to get your asset protection plan up and running in no time. We’ll:

  • Help you determine the ideal structure and jurisdiction for your asset protection trust
  • Ensure that you work with the right bank that isn’t vulnerable to court inquests or demands
  • Set up your trust with the perfect paperwork so there are no legal loopholes for a court or creditor to exploit
  • Recommend a trustee for you to appoint. The trustee will have no personal connection to you, your company, or your family members, ensuring that there isn’t any way for them to be compromised
  • Continue to work with you throughout the lifetime of your trust and its management. When you work with Dominion, you get long-term partners, not short-term legal advisors

Setting up a neutral third party as your trustee is the best way to ensure active, long-term legal protection. It’s also a good way to ensure that your trust is managed and administrated according to your wishes.

Let’s return to the example of an asset protection trust that you want to provide distributions to your grandchildren for decades into the future. If the trustee doesn’t have any personal connection to you or your family members, any future descendants won’t have social or emotional sway over the trustee to receive extra money, modify the trust, etc.

It’s like the old saying goes – you should never mix family and business. Similarly, you should never mix beneficiaries and trustees!

Contact Dominion Today

Ultimately, having a beneficiary of your asset protection trust also be the trustee is one of the worst things you can do if you want to maximize asset defense. 

By appointing a beneficiary as the trustee, you could compromise your trust's overall security and make your assets vulnerable to creditors, lawsuits, and more.

When you work with Dominion, we will counsel you not to appoint one of your beneficiaries as the trustee. Instead, we’ll help you choose the ideal trustee from our diverse network of trust administrators, many of whom provide similar excellent services to our other clients. 

To learn more, contact one of Dominion’s representatives today.


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