Content area
Full Text
As clients, attorneys and advisors were just getting comfortable with the beneficiary defective inheritor's trust (BDIT), certain practitioners have attempted to extend its use and structure. Many of these attempted extensions, referred to in this article as "BDON'Ts," have resulted in confusion and uncertainty as to whether the BDIT strategy is viable and will stand the test of time. [superscript]1
BDIT variations don't become BDON'Ts because practitioners lack skill, expertise or creativity. Rather, in today's regulatory environment, the BDIT strategy may be at capacity. It's as good as it's going to get.
Akin to a sale to an intentionally defective grantor trust (IDGT), a sale to a BDIT was painstakingly molded out of decisional law, revenue rulings and private letter rulings. [superscript]2Perhaps that's why the architects of the BDIT strategy are alarmed when practitioners modify the BDIT blueprint and redesign it so that it becomes either impractical, against best practices or both - the BDON'Ts. Though there's often room for refinement and new approaches, it's difficult to improve a strategy that creates an income tax-efficient, creditor-protected, generation-skipping transfer (GST) tax-exempt dynastic trust, with assets that can be accessed and reasonably controlled by the primary beneficiary and that can be redirected through a limited power of appointment to other beneficiaries during the primary beneficiary's lifetime and at death.
A constructionist approach to plan design may not be popular among a class of skilled and creative planners, but the six BDON'Ts described below highlight why, in the case of the BDIT, it may be best to follow the road well traveled.
Too Much Initial Funding
Some planners want to fund the BDIT with a gift exceeding the recommended $5,000. Typically, a BDIT is created and funded with a $5,000 cash gift made by a third party (the settlor), who's commonly a parent or grandparent, but could also be another family member, such as an aunt, sibling or even a friend of the beneficiary. The BDIT is specifically designed to qualify as a grantor trust as to the beneficiary, not as to the settlor. [superscript]3The planner accomplishes this by granting the beneficiary an exclusive Crummey [superscript]4withdrawal right over the entire contribution to the trust. [superscript]5The settlor's gift to a BDIT is limited to $5,000 cash [superscript]6 (cash...