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Trust Law/Level IV · Trusts that care/4.3 Protective arrangements/Lesson 1

Protective trusts: the English approach

How a protective trust under section 33 of the Trustee Act 1925 protects a life interest in England and Wales, and why English law uses it instead of a spendthrift clause.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. In England and Wales, writing that income is held ‘on protective trusts’ for a person imports the full terms of section 33 of the Trustee Act 1925 at no extra drafting cost; it works for gifts from parents or others.
  2. On bankruptcy or an attempted assignment, the life interest ends and a discretionary trust for the beneficiary and family begins, so nothing passes to the trustee in bankruptcy; the beneficiary then has no right to insist on payment.
  3. There is no lawful cheap version for one’s own property: a self-settled protective trust generally cannot defeat the settlor’s own trustee in bankruptcy, and section 33 does not save a trust otherwise liable to be set aside.
  4. A fully discretionary trust from the outset avoids the forfeiture step, since no fixed interest ever exists for creditors; a letter of wishes can guide the trustees, though it does not bind them.

MaterialsA copy of the will or trust deed you are thinking about, if you have oneThe text of section 33 of the Trustee Act 1925 (England and Wales), free on legislation.gov.ukA general sense of the financial risks a beneficiary may face, such as debt or bankruptcy (no personal details needed)Lesson 3.2.6, for comparison with US spendthrift clauses

Wonder

  1. What happens to the income if the beneficiary of a protective trust becomes bankrupt?
  2. Why can’t a will simply say that the beneficiary’s income cannot be sold or taken by creditors?
  3. How does this differ from the spendthrift trusts used in the United States?

Explore

  1. In England and Wales, a simple clause forbidding a beneficiary to dispose of a life interest, or saying creditors cannot take it, is generally void; this goes back to Brandon v Robinson (1811). English law does allow a different structure: a life interest that ends automatically when a set event happens. This is the protective trust. Because the interest is drafted to last only until the beneficiary attempts to dispose of it or becomes bankrupt, it ends at that point instead of passing to a buyer or to a trustee in bankruptcy.
  2. Section 33 of the Trustee Act 1925 provides a standard version. If a will or trust deed directs that income be held ‘on protective trusts’ for a person (the ‘principal beneficiary’) for life or a shorter period, the section supplies the terms. The income is held for the principal beneficiary until they do, attempt or suffer anything, or any event happens, that would deprive them of the right to receive it, such as bankruptcy or an attempted assignment. An advance of capital under a statutory or express power does not count.
  3. If that first interest ends, the income for the rest of the period is held on a discretionary trust. The trustees may apply it for the maintenance, support or other benefit of the principal beneficiary and their spouse or civil partner and children or more remote issue; if there are none, of the principal beneficiary and the people who would be entitled if the principal beneficiary were dead. The principal beneficiary can still be helped, but no longer has a right to the income, so there is no fixed interest for a creditor or trustee in bankruptcy to take.
  4. The section is a default, not a requirement. It applies subject to any variation in the trust instrument, and a deed can set out its own forfeiture events and discretionary class instead of using the phrase. Section 33 also does not validate a trust that would otherwise be liable to be set aside. In particular, a person who puts their own property into a protective trust for themselves generally cannot rely on a forfeiture triggered by their own bankruptcy against their trustee in bankruptcy. Protective trusts are mainly used for gifts from parents or others.
  5. US spendthrift clauses work differently. In US states following the Uniform Trust Code, a clause restraining both voluntary and involuntary transfer is valid in itself (§502), and the beneficiary keeps their interest; creditors cannot reach it until it is paid out, subject to exceptions (lessons 3.2.6 and 4.3.2). In England and Wales, the protection comes instead from the fixed interest ending and being replaced by discretion. One consequence is that, after forfeiture, the beneficiary depends on the trustees’ decisions and cannot insist on payment.
  6. Protective trusts have trade-offs. Forfeiture can be triggered by events the settlor did not foresee, and the beneficiary cannot undo it: the discretionary trust continues for the rest of the trust period. The trustees must then exercise their discretion properly, and the beneficiary’s family members also become possible recipients. Tax treatment and the interaction with insolvency law follow their own rules. Whether a protective trust suits a family depends on its circumstances; this lesson describes the structure and does not suggest using it.

Key facts

  • In England and Wales, a restraint on alienation of a life interest is generally void; this goes back to Brandon v Robinson (1811).
  • Under section 33 of the Trustee Act 1925, income held ‘on protective trusts’ goes to the principal beneficiary until bankruptcy, an attempted disposal or another event that would deprive them of it.
  • After forfeiture, the income is held on discretionary trust for the principal beneficiary and their spouse or civil partner and issue (or, if there are none, those next entitled).
  • Section 33 applies subject to variations in the trust instrument and does not validate a trust that would otherwise be liable to be set aside.
  • A person generally cannot use a protective trust of their own property to defeat their own trustee in bankruptcy.
  • A US spendthrift clause leaves the beneficiary’s interest in place and blocks creditors; the English protective trust ends the fixed interest and replaces it with discretion.

Exercise nine, six, three, one

9CollectList up to 9 events that could, in general, affect a beneficiary’s right to income from a trust (some lists are shorter), such as bankruptcy, an attempt to sell the interest, a court order or a debt.
6ClusterSort them into 6 categories: insolvency, voluntary dealings by the beneficiary, court orders, family events, events outside anyone’s control, and events you are unsure about.
3DistillReduce the 6 categories to 3 groups: events that would usually cause forfeiture under section 33, events that usually would not, and events that depend on the trust’s own wording.
1CrystallizeWrite 1 sentence explaining, in your own words, what changes for the beneficiary when a protective trust’s life interest ends.

Fact check

Dates, figures and claims checked against the published sources listed below.

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