The principle of Self-settled spendthrift trust

Self-settled spendthrift trusts are very popular under US laws. It is important to look at the basic principle for possible future legislation in the Philippines.

Self-settled trust is a kind of trust where the grantor (i.e. creator, settlor or donor) is one of the beneficiaries, or the sole beneficiary of the trust. Spendthrift trust is a kind of trust where the beneficiary receives income from the trust, but the trustee is prohibited from distributing any of the principal to other parties. As its name implies, a spendthrift trust is a good way to keep an irresponsible son or daughter from squandering his or her inheritance on foolish investments or luxury purchases.

A self-settled spendthrift trust is a kind of trust that is a combination of a self-settled and a spendthrift trust. It is a self-settled trust with a spendthrift provision that the beneficiary (who is also the grantor of the trust) is prohibited from transferring his interest in the trust to other parties (i.e. his creditors).

With a spendthrift trust, the trustee is given discretion to make or not make distributions to beneficiaries. Because distributions are discretionary, beneficiaries are prevented from voluntarily or involuntarily transferring current or future rights in the trust. In other words, beneficiaries cannot give away trust income or principal in advance of receiving it. One effect of such alienation language in a trust is that creditors of a trust beneficiary cannot claim that trust assets are assets of the beneficiary. Therefore, creditors cannot stake a claim against trust assets, but can only collect money that is actually distributed to the beneficiary.

For the self-settled spendthrift trust to work, it is important that trustees must be independent; the grantor cannot be a trustee or co-trustee, and must not perform any of the trustee's duties, such as filing fiduciary tax returns or maintaining trust records. However, the grantor can provide investment advice to the trustee and retain the power to veto trust distributions.