By Steven J. Oshins, Esq., AEP (Distinguished)

INTRODUCTION

Most estate planning attorneys 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 the beneficiary reaching age 30 and the balance upon the beneficiary 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 benefits that a trust can provide.

Most of our 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 these clients, trusts, possibly combined with various estate planning maneuvers to increase the size and growth of GST tax-exempt trusts, are generally recommended in place of straightforward, outright transfers. For those clients who want to pass on their wealth so that the preferred beneficiaries (typically members of the oldest then living generation) 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.

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 he would have had if he 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.

The Beneficiary Controlled Trust concept is fairly simple. It is a trust in which the primary beneficiary either is the sole trustee or co-trustee and has the ability to fire any co-trustee and select a successor co-trustee. Typically, control of the trusteeship is coupled with a broad non-general power of appointment that can have the effect of eliminating any potential interference by remote beneficiaries. Because the primary beneficiary/trustee possesses the ability to eliminate all participation in the enjoyment of the trust assets by secondary and more remote beneficiaries, the latter will not be inclined to interfere because their rights could be eliminated.

From a beneficiary’s perspective, the beneficiary can be given more benefits in a trust than he could obtain 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.

Obviously, not all clients share the foregoing philosophy, and sometimes circumstances preclude or suggest that all power not be lodged in a beneficiary. For such clients, the estate plan should be designed to take into account and reflect the specific variations and desires of the client to accomplish his objectives.

Illustrations of circumstances where the client would not select a Beneficiary Controlled Trust include situations where the beneficiary is either legally (e.g., a minor) or practically (e.g., inexperienced, disabled, lacking judgmental skills, etc.) incapable or unable to assume managerial responsibility; where the client wants to limit the beneficiary’s enjoyment of the property, enabling others to enjoy and share in the wealth; or where the client wants to limit the beneficiary’s power of disposition over the property. In such instances, a trust, although not a Beneficiary Controlled Trust, should be considered, even for transfers in which tax considerations are not a substantial factor.

TRUST DESIGN

The trust scrivener should consider different trust designs. 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 protection and flexibility.

The much better 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.

The primary beneficiary can have a non-general power of appointment permitting the primary beneficiary to appoint the trust assets to anyone but himself, his estate, his creditor or the creditors of his 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.

The trust agreement also drafts around the prudent man or prudent person standard, thereby allowing the primary beneficiary, as trustee, to invest however he wishes without requirements for diversification. This puts the financially capable primary beneficiary in the same position he would be in had he owned the assets outright.

CONCLUSION

For those clients who would otherwise pass their gifts and bequests outright, the better alternative is to use a Beneficiary Controlled Trust.  Although there are multiple structural options, the fully discretionary version with bifurcated trustee roles is the superior option.

RELATED EDUCATION

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

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 soshins@oshins.com or at his firm’s website, www.oshins.com.