In theory, setting up a trust and reaping its many benefits sounds great. In practice, however, giving up all control of your assets can be downright frightening. Well, now you can avoid “Estate Planning FOMO” (Fear Of Missing Out) and cozy up to the Beneficiary Defective Irrevocable Trust without fear.

When used correctly, the BDIT is as sensible as it is beneficial, offering substantial asset protection and tax planning benefits. So how does it work?

• First, a third party such as a grandparent or parent, creates a trust and names you as beneficiary and trustee to that trust.
  •  This gives you management rights over the trust.
•  Second, the trust should name an independent trustee to choreograph the trust and make strategic decisions regarding things like trust-owned life insurance, discretionary distributions, and tax matters.
  • Since you (the client) didn’t set up the trust on your own or initially fund the trust with your own money, you can benefit from all the wonders the trust world has to offer.
•  Third, you can sell large appreciated assets to the trust in return for a promissory note for the purchase price, without triggering capital gains tax implications.
  • By doing this, you essentially “freeze” the value of your taxable estate.
  • For example, if you sell your family business to the BDIT, any growth of income and assets within the BDIT can benefit you and your family without being touched by estate taxes.

If it isn’t clear already, why is a BDIT a good idea? It’s not—it’s a GREAT idea. If executed properly, the BDIT can shield your assets inside the trust from claims against creditors. Also, you will receive a multitude of rights as trustee and beneficiary of the trust. For example, you’ll be able to:

• Receive income from the trust;
•  Make withdrawals from the trust assets (usually limited items related to health, education, or support);
• Remove and replace the independent trustee;
•  Use trust property rent-free;
•  Generally manage the trust assets, and;
•  Have the power to rewrite the trust under special circumstances.

Notably, a BDIT is “income tax defective,” which means that as the grantor and trustee, you are “granted” with withdrawal powers and other benefits, but you are required to pay the trust’s income taxes. “Hmm…well, why would I want to pay more income taxes?” With grantor trusts like the BDIT, paying the income tax is a big trade-off, allowing the trust’s income to grow outside of your estate, allowing you to use the income as you wish, let it grow inside the trust, and reducing your taxable estate by the amount of taxes you have paid. Over time, you and your descendants will be thrilled with your prudent choice to embrace the BDIT.

This is complicated, of course, but the extra effort can really pay off in the end. If you have any questions regarding your estate or are interested in creating a BDIT, please contact the experienced estate planning attorneys at Lonich Patton Erlich Policastri for further information. The attorneys at Lonich Patton Erlich Policastri have decades of experience handling complex estate planning matters, including wills and living trusts, and we are happy to offer you a free consultation.

Please remember that each individual situation is unique and results discussed in this post are not a guarantee of future results.  While this post may detail general legal issues, it is not legal advice.  Use of this site does not create an attorney-client relationship.