The term protective trust refers to a variety of agreements established to preserve the wealth of the donor or their heirs. Protective trusts are established to lower estate taxes, as well as safeguard assets from lawsuits, financially-irresponsible beneficiaries, and bankruptcy.
Protective trust is an overarching term used to describe any trust established with the objective of preserving the donor's wealth. Specifically, these agreements ensure the assets of the donor are efficiently passed on to the trust's beneficiaries. This protection includes the effects of a bankruptcy proceeding, federal estate or gift taxes, divorce, or even a spendthrift beneficiary.
Also referred to as an asset-protection trust, a protective trust may be established as an annuity, providing the beneficiary with a reliable source of income. They can also be established to provide funding for college, as is the case with an education trust. When attempting to protect assets from creditors, the donor may establish a trust in which they are also designated as the beneficiary.
Protective trusts may also include an agreement stating the beneficiary loses their rights if certain conditions are not met or events occur. For example, the trust may terminate if a beneficiary becomes financially-irresponsible as defined in the agreement.