Self-Settled Trusts

(a.k.a. self-designated trusts, spendthrift trusts)

In this type of irrevocable trust, the grantor (who is also a main beneficiary) appoints an independent trustee to control all trust distributions. A self-settled trust can be particularly attractive to people more vulnerable to civil lawsuits due to their profession, including business owners, physicians and attorneys. It can also help reduce the amount of assets subject to federal estate tax.


Asset protection―The trust’s spendthrift provision prohibits the grantor AND future creditors (including former spouses) from directly accessing trust assets. As long as the grantor isn’t subject to active or anticipated creditor claims when creating the trust, the assets will be protected from future creditors. While trustees can and usually do make distributions to grantor beneficiaries, they still maintain a level of independence and are not actually required to do so. (In South Dakota, trust laws ensure creditor protection for self-settled trusts and give the grantor a certain level of control and disposition rights.) Trustees may stop distributions in expectation of claims against the grantor by creditors or former spouses.

Transfer tax liability reduction―A self-settled trust may be used when the grantor wants to maximize the lifetime gift tax exemption but is concerned about having sufficient assets to live on for the long-term. In this case, the grantor can be a beneficiary and receive distributions periodically as directed by the independent trustee. When the grantor dies, all remaining assets pass to the other beneficiaries without being subject to estate taxes.

Cautionary notes
  • Less than a third of U.S. states allow this type of trust, with regulations varying by state.
  • The grantor must choose a trustee who lives in the state where the trust is created.
  • The grantor can’t control the distribution decisions made by the independent trustee.
  • Safeguards prevent grantors from creating a self-settled trust to defraud or protect assets from future creditors.
  • Trust assets will be at risk if regulators have any suspicions that the trust was created in anticipation of creditor claims.
  • Courts generally look harshly upon trust transfers that result in grantor insolvency.


Descriptions of trusts are intended to be informational and are not specific recommendations. Contact a trust officer at Sterling Trustees for more detailed information on what would be best suited to your circumstances.


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