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What's a Family Protection Trust? Everything You Need to Know

What's a Family Protection Trust? Everything You Need to Know

August 03, 2023

Do you wish that there was some way to leave an inheritance behind for your loved ones and know that it was spent according to your wishes?

There are many types of trusts you can establish, including charitable remainder trusts, which can provide ongoing income payouts to support family members named as your beneficiaries. Alternatively, a family protection trust may be the answer you have been looking for to maximize tax benefits and safeguard your beneficiaries. 

However, finding a provider who specializes in this type of trust can be tricky. If you are thinking about the future of your family, here is everything you need to know about the setup and benefits of a family protection trust. 

What is a Family Protection Trust? 

A family protection trust is a legal trust that allows you to protect an inheritance, which you have worked hard to leave behind for your beneficiaries. It separates some assets from your estate, making it favorable for tax purposes while also shielding wealth for the generations to come. It can be set up as either a revocable or irrevocable trust.

In this type of trust, you are taking some of your assets out of your probate estate and placing them into the trust, which can help protect them from the financial mismanagement of your beneficiaries. If you worry about how your wealth will be spent or know that a beneficiary has a problem with debt, you can protect the assets in the trust from creditors and lawsuit settlements. 

Family protection trusts can also be used to carry out your own wishes for how the money will be spent. You entrust the assets to a trustee who is meant to take legal control over the contents of your trust. From here, they can dole out the assets and money to the beneficiaries according to the guidelines you put in place. 

Deciding to use this type of trust offers a layer of protection. You can use a sprinkled distribution so that the inheritance lasts for a lifetime rather than just short-term gain. It also functions as spendthrift protection for those who may spend wildly upon coming into money. 

However, many people also use it as a special needs safeguard, as it does not put private or even public benefits at risk.

Types of Family Protection Trust

Because of the varied nature of the family protection trust, there are three unique types that you may encounter: domestic, foreign, and Medicaid. 


This one is going to be very dependent on your location, as not all states permit the formation of family protection trusts. If you reside in a state that does allow for this, you will find that it is easy and straightforward to set up. You may be required to be a resident of the state in which you want to set up a family protection trust. 


If you have a sizable amount of wealth that you would like to pass along to the next generation, then a foreign or off-shore trust might be the best option. Foreign trusts have some great benefits when it comes to your taxes and are often a bit more private than domestic ones. 

Balance these benefits with the cost for setting one up though, as they are likely to be far more costly. 


If you need Medicaid benefits to cover the care of a loved one (including long-term care like assisted living or in-home support), you might want to create a Medicaid family protection trust. While Medicaid may cover the cost of some types of care, you are often required to sell off assets before Medicaid kicks in. 

With a family protection trust in place, your loved one is protected from having to liquidate those assets before Medicaid covers the cost. It allows them to tap into this excellent public resource without dipping into their inheritance. There are lookback periods that would disqualify the recipient, so time considerations are essential to success. 

Pros of a Family Protection Trust

There are tons of benefits to opening a family protection trust to spread your wealth around to your loved ones. First, a family protection trust is a great option to help you minimize taxation on your child’s estate. This means that assets will not be taxed twice. 

The funds and assets contained within the trust are also fully protected from both creditors and lawsuits. Even in the event of a divorce, a beneficiary’s portion of inheritance is not likely to be counted among the spoils of splitting the marital finances. 

It can also offer more protection for loved ones who need long-term care. Medicaid is a resource that many people with long-term care needs tap into, but it may require them to spend down all of their assets before coverage kicks in. A family protection trust does not require those assets to be liquidated prior to Medicaid covering the cost. 

You also enjoy a great degree of confidentiality, even more so if you opt for a foreign trust. 

Cons of a Family Protection Trust

While the benefits of setting up a family protection trust are certainly appealing, there are a few drawbacks to this type of trust as well. First and foremost, the cost of the trust may be off-putting to many people. They can be expensive to set up, as many providers are not experienced in family protection trusts. 

Plus, you may need a professional trustee which comes at an additional cost. In some cases, you might be willing to name a child as the trustee if they are competent and capable of following your wishes for the assets and wealth contained within the trust. 

You may also be subject to more scrutiny from the IRS and you may need to file an informational return on the trust to report what it contains. 

Consult with Magellan Planning Group Today

Don’t leave your future wealth to chance. Magellan specializes in protective trusts that can help you to have the best outcome for your wealth and assets, leveraging them for the benefit of your beneficiaries. Contact us today to learn more about how we can help you set up this unique type of trust!