How a trustee can protect a spendthrift beneficiary

If you are the settlor, a parent or an adviser, the question is usually the same: can a trustee protect a spendthrift beneficiary from their own habits, without turning the trust into a punishment? In many cases the answer is yes, within limits. A trust separates ownership of the assets from their enjoyment, and that separation is exactly what gives a trustee room to pace money out, pay costs directly and offer support. What a trustee can actually do, however, depends on the trust deed, on the governing law and on the person concerned.

This page looks at the situation from the angle of choosing and assessing the trustee: which tools to look for, and how to tell whether a trustee will use them well.

What the law gives a trustee to work with

The Hague Trusts Convention describes a trust as a relationship in which assets are placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose. The assets form a separate fund, title is held in the trustee's name, and the trustee must manage and account for them. That structure matters here: a beneficiary generally does not own the capital, so a request is a request, not a withdrawal right, unless the deed says otherwise.

In Switzerland, professional trustees are financial institutions under the Financial Institutions Act (FinIA, or LEFin in French). They are supervised by FINMA, which involves a supervisory organisation in the day-to-day oversight. Supervision is not a guarantee that a trustee will handle a difficult beneficiary wisely, but it does set a framework of qualified management and accountability. The FINMA and SO-FIT guide explains what approval does and does not tell you.

One limit deserves a mention. The Convention does not displace mandatory rules of the forum on the protection of minors and persons lacking capacity. If a beneficiary is a child, or has lost the capacity to manage their affairs, protective rules outside the trust may apply and may sit alongside the trustee's own powers.

Who is the "spendthrift" beneficiary?

The label is blunt. In practice it covers several quite different people:

• a young adult receiving a first distribution with no experience of managing capital;
• a beneficiary with a gambling, spending or substance problem;
• someone whose partner or business associates put pressure on them;
• a beneficiary who is simply inexperienced, and would manage well with guidance.

These call for different responses. A trustee who treats all of them with the same refusal is not protecting anyone; a trustee who pays out whatever is asked is not doing so either.

Example: a family established in Lausanne creates a discretionary trust for three children. The youngest, now an adult, asks the trustee for a very large sum to buy into a friend's venture. The trustee has no wish to say no on principle, but also cannot simply transfer the money. What happens next is the point of this page.

The tools a trustee has

Staged distributions

Rather than one lump sum, the trustee, where the deed permits, releases capital in instalments tied to milestones: completion of studies, a stable period of income, the opening of a business account with reporting. Staging gives the beneficiary a chance to show how they handle money, and gives the trustee room to stop if things go wrong.

Direct payment of costs

Instead of handing over cash, the trustee pays the landlord, the university, the insurer or the tax authority directly. The beneficiary keeps the benefit and loses the opportunity to divert the money. For many families this is the least intrusive form of protection.

Support alongside money

A trustee can arrange or encourage budgeting help, financial education, or an independent adviser for the beneficiary. Where the problem is an illness or an addiction, the trustee's role is to support the person and, if the deed allows, to fund treatment, not to diagnose.

Conditions and incentives

Some deeds allow the trustee to attach conditions to distributions, or to match the beneficiary's own earnings. These tools can motivate, but they can also create resentment and disputes if they are applied unevenly. The discretionary trust page describes how discretion is exercised in practice.

Handling a request for a large sum

A request for a large amount is the typical entry point. A careful trustee does not react to the amount alone. The usual sequence looks like this:

The seventh step is easy to overlook, and it is the one that protects everybody. A recorded reasoning is what lets a beneficiary, a protector or a reviewer see that the decision was considered, not arbitrary.

What a trust cannot do

A trust is a useful frame, not a cure. It cannot:

• change the behaviour of an adult who does not want help;
• override the deed: if the beneficiary has a fixed entitlement, the trustee may have no discretion to hold back what is due;
• shield assets in every circumstance; protection from creditors has limits, and mandatory rules of the forum can apply;
• replace guardianship or adult protection measures where a person truly lacks capacity.

If the beneficiary's entitlement is fixed, the trustee's room is narrower. The page on fixed interest trusts looks at how that changes the picture. And where a settlor wants more control than a trustee should have, see settlor reserved powers.

Alternatives and complements

The trustee, protector and beneficiary triangle shows how these roles interact. Where the beneficiary's difficulties sit inside a wider family tension, blended family trustee neutrality is also relevant.

How to assess a trustee for this situation

A trustee who is good at ordinary administration may be less good with a vulnerable beneficiary. Before you appoint or keep a trustee, check the following.

• Does the trustee have experience with beneficiaries who need support, and can they describe it without naming clients?
• Will the trustee talk to the beneficiary directly, not only to the family or the adviser?
• Is there a written policy for distribution requests, including large ones?
• Does the deed give the trustee enough discretion, and enough protection, to say no?
• Is the letter of wishes up to date, and does the trustee read it?
• Is a successor trustee named in case the individual trustee falls ill?

The guide to choosing a trustee in Switzerland offers a wider decision method, and due diligence on your trustee lists what to ask. A letter of wishes is often the best place to explain to the trustee what kind of support you would want for a particular child.