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

The Beneficiary Controlled Trust name was first introduced to the estate planning industry by my father and me in our two-part article, “Protecting & Preserving Wealth into the Next Millennium,” published in the September and October 1998 issues of Trusts & Estates magazine.  [Portions of this article were taken from the 1998 article.]  Since that time, the Beneficiary Controlled Trust concept has been widely used by estate planners all over the country.  This article describes this philosophy.

Background

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 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 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.

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.

Beneficiary Controlled Trust Concept

The Beneficiary Controlled Trust is a trust in which the primary beneficiary either is the sole trustee or 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 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.

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

Once it has been determined that the Beneficiary Controlled Trust is the appropriate vehicle, 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 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 opts out of 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, but with the tax and creditor and divorce protection benefits that can only be obtained by receiving assets in trust.

*This article is being reproduced from Ultimate Estate Planner’s December 2018 newsletter. 

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 and one of the Top 100 Attorneys in Worth.  He is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates/Tax Law Lawyer of the Year in 2012, 2015, 2016, 2018, 2020 and 2022. He can be reached at 702-341-6000, ext. 2 or soshins@oshins.com.  His law firm’s website is www.oshins.com