Beneficiary Defective Irrevocable Trusts: Structuring BDIT, Minimizing Tax, Control Over Assets, Pitfalls to Avoid

A BDIT can provide significant estate and tax planning opportunities for clients under the right circumstances. BDITs allow a beneficiary to form assets while also maintaining control and protecting assets from estate taxes, creditors, and other claims. Trusts and estates counsel must understand the circumstances where BDITs will provide the best benefits to clients, key drafting considerations, and related tax implications.

BDITs are irrevocable trusts used to move appreciating assets outside of a client's estate to protect against creditors and provide potential tax savings. Provisions are included when structuring a BDIT to ensure that the trust qualifies as a grantor trust with the beneficiary being the owner of the trust assets for income tax purposes. In addition, certain transactions with BDITs can be utilized to minimize income taxes, transfer appreciating assets, and reduce estate and transfer taxes for beneficiaries.

Trusts and estates counsel must recognize key issues and pitfalls to avoid regarding (1) securing the shifting of appreciation and income tax burn, (2) structuring the sale of assets to BDITs, (3) creditor protection, and (4) administrative requirements when structuring and utilizing BDITs.

Listen as our panel discusses circumstances in which BDITs are an optimal strategy, properly drafting the BDIT to avoid adverse tax consequences, structuring sales/loans to BDITs, incorporating Crummey powers into the instrument, and other key considerations when structuring a BDIT.