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Trust Law/Level VI · Protection/6.1 Spendthrift to self-settled/Lesson 2

Third-party trusts versus self-settled trusts

Why a trust created by someone else can protect a beneficiary from creditors, while a trust a person creates for themselves generally cannot, in US and English law.

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. The cheapest shield is one someone else builds: an inheritance left in a discretionary spendthrift trust protects the beneficiary from their own creditors (UTC §§502, 504) at no cost to them. Catch: support orders and statutory claims may get through under §503.
  2. Inherited IRAs are not exempt ‘retirement funds’ in federal bankruptcy (Clark v. Rameker, 2014), so a parent can name a third-party spendthrift trust as IRA beneficiary instead. Catch: distributions remain taxable income to whoever receives them.
  3. Do not rely on a trust you fund for yourself outside a DAPT state: UTC §505(a)(2) and New York EPTL 7-3.1 let your creditors reach whatever the trustee could pay you. Catch: a revocable living trust gives no creditor protection during life (§505(a)(1)).
  4. Where self-protection matters, use free statutory exemptions first, then consider one of the 21 DAPT states counted by ACTEC in August 2025. Catch: 11 U.S.C. §548(e) reaches actual-intent transfers to self-settled trusts made within 10 years before bankruptcy.
  5. In England and Wales, a settlor’s own bankruptcy forfeiture is void (Re Burroughs-Fowler, 1916), so the lean route is a protective trust under Trustee Act 1925 s.33 set up by someone else. Catch: Insolvency Act 1986 s.423 still unwinds transactions defrauding creditors.

MaterialsYour state’s versions of Uniform Trust Code §§502-505, if your state adopted the UTC (free on state legislature websites)A trust document you are reading, to see who created it and who may benefitLesson 4.3.2, on spendthrift trusts, and lesson 6.1.3, on domestic asset protection trusts

Wonder

  1. Why can a parent protect a child’s trust money from the child’s creditors?
  2. Why can’t a person usually protect their own money by putting it in a trust for themselves?
  3. How does English law treat a trust a person creates for their own benefit?

Explore

  1. A trust has three roles: the settlor, who creates and funds it; the trustee, who holds legal title and manages it; and the beneficiary, who holds the beneficial interest. One person can hold more than one role, but if the sole trustee is also the sole beneficiary of all present and future interests, legal and beneficial title merge and the trust ends. Creditor law asks a further question: who created the trust, and is that person also a beneficiary? The answer largely decides whether the creator’s creditors can reach it.
  2. A third-party trust is created by someone other than the beneficiary, such as a parent’s trust for a child. In US states that adopted the Uniform Trust Code, a spendthrift clause stops the beneficiary’s creditors reaching the interest before it is paid (UTC §502), subject to exceptions such as support orders where a state enacted UTC §503. Under UTC §504, a creditor generally cannot force a trustee to make a discretionary distribution. Because the property came from someone else, the law respects that person’s choice to limit how it reaches the beneficiary (lessons 3.2.6 and 4.3.2).
  3. A self-settled trust is one in which the settlor is also a beneficiary. Under UTC §505(a)(2), whether or not there is a spendthrift clause, a creditor of the settlor can reach the most the trustee could pay to or for the settlor from an irrevocable self-settled trust; under §505(a)(1), a revocable trust is reachable during the settlor’s life. States without the UTC reach similar results: New York, for example, makes a trust for the creator’s own use void against the creator’s creditors (EPTL 7-3.1). The policy is that a person should not keep the benefit of property while shielding it from their own debts.
  4. A minority of US states have changed this rule by statute for domestic asset protection trusts (DAPTs), beginning with Alaska and Delaware in 1997 and Nevada in 1999; an August 2025 ACTEC comparison counted 21 such states. Each sets its own conditions and lets some creditors through (lessons 6.1.3 and 6.1.5). The protection is contested: a court may apply the law of a settlor’s home state that has no such statute, and 11 U.S.C. §548(e) lets a bankruptcy trustee reach transfers to a self-settled trust made within 10 years with actual intent to hinder, delay or defraud creditors.
  5. English law has no statute like the DAPT laws. In Re Burroughs-Fowler [1916] 2 Ch 251, a settlor had settled his own property on trust for himself for life, with his interest to end if he became bankrupt. When he did, the court held that the bankruptcy forfeiture was void against his trustee in bankruptcy, so his life interest went to the trustee for his creditors. Section 33(3) of the Trustee Act 1925 does not validate protective trusts that would otherwise be set aside, and the Insolvency Act 1986 (ss.339 and 423) lets courts set aside transfers at an undervalue and transactions defrauding creditors.
  6. The distinction explains much of asset protection law. A third-party trust protects a beneficiary because someone else chose to give with conditions; a self-settled trust protects its creator only where a statute says so, and even then courts look closely at timing and intent. Transfers made when claims exist or are foreseeable can be undone as voidable transfers (lesson 6.3.1), and courts treat attempts to shield one’s own property from existing creditors as abuse. This lesson explains the rules and their limits; it does not suggest creating any trust.

Key facts

  • A third-party trust is created by someone other than the beneficiary; a self-settled trust is one in which the settlor is also a beneficiary.
  • Under UTC §502, a valid spendthrift clause stops a beneficiary’s creditors reaching the interest before it is paid; under UTC §504, a creditor generally cannot compel a discretionary distribution.
  • Under UTC §505(a)(2), a settlor’s creditors can reach the most the trustee could pay to or for the settlor from an irrevocable self-settled trust, even with a spendthrift clause.
  • Domestic asset protection trust statutes began with Alaska and Delaware in 1997 and Nevada in 1999; an August 2025 ACTEC comparison counted 21 DAPT states.
  • Re Burroughs-Fowler [1916] 2 Ch 251: in English law, a settlor’s own life interest set to end on the settlor’s bankruptcy is void against the trustee in bankruptcy.
  • 11 U.S.C. §548(e) lets a bankruptcy trustee reach transfers to a self-settled trust made within 10 years with actual intent to hinder, delay or defraud creditors.

Exercise nine, six, three, one

9CollectList up to 9 trusts you have read or heard about (some lists are shorter), noting for each who created it, who may benefit, who is trustee and which state’s or country’s law governs it.
6ClusterSort them into 6 categories: third-party discretionary trusts, third-party spendthrift trusts, revocable trusts, irrevocable self-settled trusts, self-settled trusts under a DAPT statute, and trusts you are unsure about.
3DistillReduce the 6 categories to 3 groups: trusts where the law generally protects a beneficiary from their own creditors, trusts where it generally does not, and trusts where the answer depends on a particular statute or court.
1CrystallizeWrite 1 sentence explaining, in your own words, why the law treats a trust someone else creates for you differently from a trust you create for yourself.

Fact check

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

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