Beneficiary Flexible Trusts
BENEFICIARY FLEXIBLE TRUSTS
A Beneficiary Flexible Trusts (also often called an Inheritor’s Trust or Beneficiary Defective Grantor Trust) is a trust set up by a third party (i.e. parents) for the benefit of the beneficiary (i.e. a child). Both the trust principal and the income generated by the trust are available to the beneficiary for his/her health, education, maintenance and support. The beneficiary also has the right to withdraw the greater of $5,000.00 or 5% of the value of the trust assets each year, and the beneficiary has the broadest lifetime and testamentary non-general powers of appointment. With such great flexibility, this type of trust can be very valuable for our clients.
A few notes on the structure of these trusts: generally, the grantor (ex. Dad) initially funds the trust with $5,000.00. During the first year, the beneficiary has the power to withdraw $5,000.00 or 5% of the value of the trust. When that withdrawal power lapses, the beneficiary becomes the grantor of the trust, i.e., a grantor trust under Section 678 of the Code. Therefore, for income tax purposes, it is the beneficiary who is treated as the grantor of a grantor trust, not Dad, thus income taxes are paid by the beneficiary, sometimes at a much lower tax rate. Although, these trusts are extremely effective for children who are investing and accumulating wealth. This Section 678 “wrinkle” for the Beneficiary Flexible Trust is a bit different than the old fashioned Inheritor=s Trust that we have created in the past. However, we want to be under grantor trust status whenever possible, according to Rev. Ruling 85-13, so this “wrinkle” is extremely advantageous to that notion.
While we often advise that the beneficiary be the trustee of his or her own trust at a certain age, it is advisable to name an independent trustee as co-trustee with the beneficiary for these types of trusts We will generally set up in jurisdictions that have attractive trust law, asset protection and tax law, such as Nevada, we suggest having a co-trustee in Nevada, and have an arrangement with an estate planning firm in Las Vegas like ours that specializes in estate planning, with both CPA’s and attorneys on board, which provides our clients agents and trustees where appropriate. However, the trust should explicitly provide that no beneficiary or spouse of a beneficiary may receive any compensation as trustee. (See, Rev. Ruling 66-167.)
These Beneficiary Flexible Trusts can help ensure assets received in inheritance are not subject to creditors and minimize estate taxes at death.
*IRS regulations require that we inform you as follows: Any U.S. federal tax advice contained in this communication is not intended to be used and cannot be used for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or tax-related matters.
