By Tiffany A. Oshins
The term “Inheritor’s Trust” was service marked at the Patent & Trademark Office by my Daddy (Steve Oshins), my Grandpa (Richard Oshins) and another attorney (Noel Ice) in 2003. They abandoned the service mark in 2006 after the Patent & Trademark Office determined it to have become a term of common usage.
Despite the abandonment of the service mark, the estate planning industry continues to use the term. As a potential future inheritor, I would like to receive all gifts and bequests from Mommy and Daddy in an Inheritor’s Trust. This article will explain this concept and why it is so important to me for Mommy and Daddy to make use of it.
Most trust scriveners draft trusts that make mandatory distributions to the beneficiaries upon reaching certain ages. For example, many trusts pay out one-third upon the beneficiary reaching age 25, one-half of the balance upon reaching age 30 and the balance upon reaching age 35. This is commonly known as a Staggered Distribution Trust since the distributions are staggered over different time periods. The philosophy used in this type of trust design is that the beneficiaries have multiple opportunities to learn from their mistakes. However, Staggered Distribution Trusts fail to take into account most clients’ goals to leverage the estate tax savings and creditor protection and divorce protection benefits that a trust can provide.
I have often heard Daddy discuss Staggered Distribution Trusts in his presentations, and let’s just say that he is not a fan. I’ll leave it at that!
Most of Daddy’s clients want to leave their property to their loved ones outright, provided that at the time of the gift or bequest the desired recipient is capable of managing the property wisely. For those clients who want to pass on their wealth so that the preferred beneficiaries obtain the enjoyment of the property in a manner as close to outright ownership as possible, with possible trade-offs in order to increase flexibility, tax and creditor benefits, a Beneficiary Controlled Trust should be used.
Assuming I’m well-behaved and grow into the woman that Mommy and Daddy expect me to become, if they choose to make any gifts or bequests to me, I would like to receive them in an Inheritor’s Trust.
An Inheritor’s Trust is a Beneficiary Controlled Trust where the future inheritor asks her parents or grandparents or other future donors to make any gifts or bequests to a trust designed with the attributes described in this article. According to Daddy, the concept is to have his clients receive their gifts and bequests in the same manner in which Daddy sets up his clients’ gifts and bequests.
BENEFICIARY CONTROLLED TRUST CONCEPT
The Beneficiary Controlled Trust is designed to provide the primary beneficiary with all of the rights, benefits and control over the trust property that she would have had if she owned it outright, in addition to tax, creditor and divorce protection benefits that are not obtainable with outright ownership. The ability to derive more benefits in a trust than one would obtain with outright ownership without giving up control leads one to wonder why trusts are not the vehicle of choice in virtually every estate plan and why Beneficiary Controlled Trusts are not used instead of outright transfers in almost every instance in which the transferor otherwise would be inclined to gift or bequeath the property outright.
From a beneficiary’s perspective, the beneficiary can be given more benefits in a trust than can be obtained with outright ownership. For the client who would transfer property to the objects of his bounty outright, it is difficult to reconcile not making the transfer to a trust that the primary beneficiary controls since the primary beneficiary can control the trust virtually without limitation and interference from any secondary beneficiaries and still receive the tax and creditor protection benefits of the trust vehicle.
A trust designed with control in the hands of the primary beneficiary (and secondary beneficiaries who become primary beneficiaries upon the demise of the primary beneficiary), coupled with a special power of appointment that would enable the primary beneficiary to cut out a complaining secondary beneficiary, should be free of interference and thus is the singularly most important component of the estate and creditor protection plan.
Once it has been determined that the Beneficiary Controlled Trust is the appropriate vehicle, the trust scrivener should consider different trust designs.
Health, Education, Maintenance and Support Option: The simplest design is to use the primary beneficiary as sole trustee with distributions for health, education, maintenance and support. However, this trust design, although simple, does not provide the greatest degree of creditor and divorce protection and flexibility. It also causes an otherwise unnecessary state income tax if any of the beneficiaries resides in California, North Carolina, Georgia or Tennessee (Tennessee’s state income tax repealed as of 1/1/2021). Therefore, it is generally the wrong choice, but certainly far superior to a Staggered Distribution Trust.
Discretionary Trust Option: The far superior design, although slightly more complex, is to use two trustees. In this design, the primary beneficiary is given the investment powers and an independent trustee, such as the primary beneficiary’s close friend or a corporate trustee, is given the power to make distributions in such co-trustee’s sole and absolute discretion. The primary beneficiary is given the power to remove and replace the trustees, but can only replace the distribution trustee with an unrelated party who is also not a subordinate employee. I would like Mommy and Daddy to use this superior design since I want the greatest degree of creditor protection and divorce protection available.
Power of Appointment: The primary beneficiary can have a non-general power of appointment permitting the primary beneficiary to appoint the trust assets to anyone but herself, her estate, her creditor or the creditors of her estate. This flexibility enables the primary beneficiary to cut out any remote beneficiaries who complain about the trustee investment decisions or the amount of distributions given to the primary beneficiary.
Opt out of Prudent Man/Prudent Person Standard: The trust agreement also opts out of the prudent man or prudent person standard, thereby allowing the primary beneficiary, as trustee, to invest however she wishes without requirements for diversification. This puts the financially capable primary beneficiary in the same position she would be in had he owned the assets outright, but with the tax and creditor and divorce protection benefits that can only be obtained by receiving assets in trust.
The author would like to thank Steve Oshins (AKA Daddy) for his guidance and assistance in typing this article. Since she can’t type yet, he did all of the typing. ☺
If you found this article interesting, you might also be interested in these other educational programs and products by Steve Oshins:
- Estate Planning Techniques in a Time of Low Interest Rates
- The Installment Sale to an Intentionally Defective Grantor Trust
- The Grantor Retained Annuity Trust: Significant Estate Tax Savings with Nearly Zero Gift Tax Risk
- Advanced-Level Estate Planning Sales & Marketing Kits
- Steve’s FREE State Rankings Charts
ABOUT THE AUTHOR
Tiffany A. Oshins was born on March 25, 2020 to parents Steve and Elena Oshins. She has been featured in Congratulations to Steve & Elena Oshins, The Ultimate Estate Planner (March 30, 2020) and in Nevada Trust Big Becomes More Dynastic, The Wealth Advisor (March 31, 2020). She doesn’t yet have a phone number, email address or website.
ABOUT THE AUTHOR’S DADDY
Steven J. Oshins, Esq., AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He was named one of the 24 “Elite Estate Planning Attorneys” and the “Top Estate Planning Attorney of 2018” by The Wealth Advisor. Steve was also named one of the Top 100 Attorneys in Worth and is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates Lawyer of the Year in 2012, 2015 and 2018 and Tax Law Lawyer of the Year in 2016 and 2020. He can be reached at 702-341-6000, ext. 2, at firstname.lastname@example.org or at his firm’s website, www.oshins.com.