What can you do when you want to leave something in your will to a loved one, but are concerned that they will not be able to manage their inheritance adequately? It may be worthwhile considering establishing a protective trust for your loved one.

What is a protective trust?

Under a protective trust, the money or assets (inheritance) bequeathed in the will to the vulnerable loved one (beneficiary) are held by another person or organisation (the trustee) to look after on behalf of the beneficiary. The trustee then manages the inheritance in the way they think most appropriate, reducing the risk of the beneficiary wasting the inheritance. For example, the trustee may use the trust funds to buy a home for the beneficiary or to pay the beneficiary’s living or education expenses.

Who would benefit from protective trusts?

Protective trusts safeguard vulnerable beneficiaries who may not be able to adequately handle their financial affairs because they:

• have a disability;
• suffer from a mental illness;
• have an addiction i.e. to drugs, alcohol or gambling;
• are bankrupt or struggle to manage their finances;
• are spendthrifts or are easily influenced;
• are too young to be suddenly managing large sums of money; or
• are easily or unduly pressured by others, such as their partner or a family member.

How does a protective trust work?

Usually, a trustee uses the income and capital of the trust for the ongoing benefit of the vulnerable beneficiary or for an approved purpose specified in your will.

Each financial year, sufficient income and capital is given to the beneficiary to cover the cost of the approved purposes.

The protective trust can be established so that any remaining income can stay in the trust, or be distributed to any other beneficiaries (for example, the vulnerable beneficiary’s children).

It is possible to tailor the terms of protective trusts to address your specific concerns, however, this should not be done without consulting a lawyer who can advise you in relation to the specific terms you wish to set. If you are considering establishing protective trusts for a beneficiary, please do not hesitate to contact me.