• Patrick D. Newton is a North Carolina Board Certified Specialist in Estate Planning and Probate Law.

Beneficiary Controlled Trusts

What is a Beneficiary Controlled Trust?
A Beneficiary Controlled Trust is an estate or gift tax planning technique where parents leave property to their children in a trust rather than outright. As the name implies, the child-beneficiary is the trustee of the trust. Thus, the Beneficiary Controlled Trust.
Why are estate planners and their clients increasingly using Beneficiary Controlled Trusts?
It is easier to explain why, if we first understand that there are essentially two methods to leave property to the typical child, excluding those that are irresponsible, etc., they are:
  • Outright to the child
  • In a trust for the child where the child is the trustee

As we are assuming that there are only two methods to leave the property, we need to compare them against one another.

What are the factors used in the comparison?

We start by listing the things that a beneficiary can do when the property is left outright and free of trust with how those same things included in a Beneficiary Controlled Trust.

What can an owner of property do with the property?

There is actually a fairly limited number of things, they can do, they are:

  • Give the property away
  • Leave the property to anyone they want
  • Use the property without paying for the use
  • Sell the property
  • Destroy the property
  • Lose the property to a creditor
  • Lose the property to a divorcing spouse

Do I understand correctly that you are now going to compare the ability of the beneficiary-trustee of a Beneficiary Controlled Trust to do the same things that an outright beneficiary could do?

Yes, that is exactly correct. Let’s see what the comparison shows:

  • Give the property away: The beneficiary-trustee of a Beneficiary Controlled Trust may be given the power to make gifts of the property in the trust to anyone other than the beneficiary or the creditors of the beneficiary. In essence, the Beneficiary Controlled Trust is identical to the outright bequest free of trust. We’ll give this an Equal rating.
  • Leave the Property to anyone they want: The beneficiary-trustee may be given the power to leave the property to anyone other than the beneficiary’s estate, creditors of the beneficiary, or the creditors of the beneficiary’s estate. In essence, the Beneficiary Controlled Trust is identical to the outright bequest free of trust. We’ll give this an Equal rating.
  • Use the property without paying for the use: The beneficiary-trustee of the Beneficiary Controlled Trust may be authorized to use the property of the trust without paying for the use. In essence, the Beneficiary Controlled Trust is identical to the outright bequest free of trust. We’ll give this an Equal rating.
  • Sell the property: The beneficiary-trustee may be given the power to sell the property and reinvest the proceeds. In essence, the Beneficiary Controlled Trust is identical to the outright bequest free of trust. We’ll give this an Equal rating.
  • Destroy the property: The beneficiary-trustee may not be given the power to destroy the property. The Beneficiary Controlled Trust provides more property protection than an outright bequest. We’ll give the Trust a Superior Protection rating.
  • Lose the property to a creditor: The Beneficiary Controlled Trust may be prepared in such a manner that creditors of the beneficiary-trustee may not attach assets held in the Beneficiary Controlled Trust. The Beneficiary Controlled Trust provides better creditor protection. We’ll give the Trust a Superior Protection rating.
  • Lose the property to a divorcing spouse: The Beneficiary Controlled Trust can be prepared such that a divorcing spouse has little or no rights to the Beneficiary Controlled Trust’s property. The Beneficiary Controlled Trust provides better asset protection. We’ll give the Trust a Superior Protection rating.
Now, let’s see how the Beneficiary Controlled Trust did in the item by item comparison:

Give the property away

EQUAL
RATING

Leave the property to anyone they want

EQUAL
RATING

Use the property without paying for the use

EQUAL
RATING

Sell the property

EQUAL
RATING

Destroy the property

SUPERIOR
PROTECTION

Lose the property to a creditor

SUPERIOR
PROTECTION

Lose the property to a divorcing spouse

SUPERIOR
PROTECTION

Since the Beneficiary Controlled Trust is so far superior to outright bequests, why doesn’t everyone use them?

The primary reason is many estate planning practitioners are simply not familiar with the technique. In addition, some clients simply do not want, what they perceive to be, “complicated estate plans.”

Are Beneficiary Controlled Trusts complicated?

No, they are not. An easy comparison is the Family or Credit Shelter Trust that holds the estate tax free amount for the first spouse to die. An annual tax return is due and accounting and monitoring must be done. However, it seems to me that the benefits provided by the Beneficiary Controlled Trust far outweigh the additional costs after the surviving spouse has died.

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