Don’t Make a Financially or Maritally Vulnerable Child the Trustee ofTheir Own Creditor Protected Inheritance Trust

Many modern estate plans place a child’s inheritance assets into a creditor-protected beneficiary trust, often a spendthrift, general needs, or “discretionary” trust, rather than distributing assets outright to the beneficiary in the form of cash, stocks, or real property put directly into their name. This type of inherited trust structure is designed to insulate the inheritance from a child’s future creditors, lawsuits, bankruptcies, and divorce pressure.

 A common drafting mistake can erode those protections. Naming that same child, especially a child with potential credit issues or marital instability, as the trustee of the trust that is supposed to protect them introduces significant risk. Experienced estate planning attorneys can advise clients on the best way to protect vulnerable family members and how to properly draft these documents to avoid estate plans going sideways. Unlicensed individuals purporting to draft estate planning documents for others, or estate planning “point-and-click” software systems, often do not know the dangers that lurk in poorly drafted legal documents.

Both Tennessee and Florida recognize and enforce spendthrift and discretionary trusts. However, the trustee position carries meaningful authority, and the way that authority is structured can determine whether the asset protection functions as intended. Tennessee and Florida validate spendthrift provisions that restrict voluntary and involuntary transfers of a beneficiary’s interest. Both also recognize that when a trustee has discretionary authority over distributions from the trust, a beneficiary’s creditor generally cannot compel a distribution to the creditor or attach a purely discretionary interest. The complication arises when the beneficiary is also the trustee and can make or materially influence distributions to themselves.

Under Florida law, if a trustee’s discretion to make distributions for the trustee’s own benefit is limited by an ascertainable standard (“HEMS”: Health, Education, Maintenance, or Support), creditors are generally limited in the same way they would be if the beneficiary were not serving as trustee. Tennessee law similarly provides strong protections for discretionary interests and addresses circumstances in which a beneficiary serving as trustee does not automatically defeat creditor protection, particularly when distribution authority is limited or subject to consent of an independent co-trustee; however, even with statutory guardrails, beneficiary control creates practical litigation risk. Creditors or divorcing spouses may not be able to seize the trust outright, but they can pursue discovery, depositions, and aggressive legal challenges to test whether the trust is functioning as a true third-party discretionary trust or as a personal resource under the beneficiary’s effective control. As a matter of practice, we regularly advise clients not to make the beneficiary also the trustee because non-professional trust administrators often do not follow the guidelines in the trust and the law.

Trust administration matters. Informal distributions, inconsistent documentation, commingling of funds, or a pattern of regular support payments can create factual arguments that undermine the intended protection. A financially stressed beneficiary trustee may be more likely to blur fiduciary boundaries, even unintentionally.

Mandatory distributions present additional exposure. If a trust requires distributions at specified times and those distributions become due, creditors in many states may be able to reach past due mandatory distributions. A beneficiary trustee who is under financial pressure may mishandle timing or documentation in ways that create unnecessary vulnerability. 

Divorce litigation frequently focuses on access and control. Even if the trust is properly structured as a third-party trust with spendthrift language, a beneficiary who serves as trustee may invite arguments that the trust is a practical financial resource available for support or equitable distribution analysis. While outcomes are fact specific, eliminating unnecessary control reduces litigation risk.

The most defensible structure in situations involving potential creditor or marital instability is to separate beneficial enjoyment from distribution authority. An independent trustee or at least an independent distribution trustee can exercise discretion without the inherent conflict of self dealing. Alternatively, a co-trustee structure can allow the beneficiary to participate in investment or administrative functions while reserving distribution authority to an independent fiduciary.

Additional safeguards such as trust protector or trust advisor provisions can provide flexibility while preserving independence in distribution decisions. If the estate planning objective is to provide meaningful creditor and divorce resilience, appointing a financially vulnerable child as sole trustee of their own creditor protected inheritance trust often undercuts that objective. Tennessee and Florida law provide strong tools for asset protection, but the strength of those tools depends not only on the language of the trust, but also on who holds and exercises the power to distribute.