Why YOU should have a BDIT

As a business owner, does anything sound better than having your business protected from creditors and having it grow completely outside of your estate while still having full control over it? The Beneficiary Defective Inheritor’s Trust (the “BDIT”) technique allows all of that. Essentially, a trust beneficiary, the business owner, YOU, can grow your business in a trust established for you by someone else.

The biggest advantage of this strategy is that the BDIT will be for the benefit of the business owner and will be completely discretionary, so there will be no problem getting money out of the company if needed. Some other benefits of this trust are that the beneficiary/business owner has significant control over the trust property and it is a grantor trust with respect to the beneficiary, so that will further remove assets from the beneficiary’s estate while the assets grow tax free. One other advantage is that a BDIT is more flexible than a defective grantor trust as far as changing beneficiaries of the trust, so it might be a good option if a parent is not sure if their child can handle a business or a similar situation.

The mechanics of the BDIT are as follows:

1. A Parent (or other third party, hereinafter the “Parent”) forms the trust (in a favorable jurisdiction for asset protection) for the benefit of the business owner;
2.  The Parent contributes $5,000 cash to the trust and allocates $5,000 of GST exemption to it;
3.  The Parent grants the beneficiary a Crummey power of withdrawal over the $5,000 for 30 days and it lapses;
4.  The Parent retains no powers that could trigger the grantor trust rules for the Parent;
5.  The Parent grants full discretion over distributions of income and principal to a third-party trustee;
6.  The child is granted the power to remove and replace the independent trustee with another independent trustee;
7.  The Parent grants a broad special power of appointment to the child, exercisable during life or at death;
8.  The beneficiary will be the Investment Trustee and control all managerial decisions; and
9.  A formula clause will be used to shift any unintended gifted assets to a non-GST tax exempt BDIT.

However, because the BDIT is a very complex strategy, it must be documented, implemented, and administered very carefully.  If all the proper procedures are followed, this transaction is legitimate despite the IRS not liking it.  Anyone with a growing business should look into a BDIT

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.