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The Montana Estate Lawyer

Monday, August 21, 2017

The Beneficiary-Controlled Trust

The beneficiary-controlled trust (sometimes call an inheritor’s trust) is a vehicle for an heir to receive - and enjoy - an inheritance without the inheritance being owned outright by the heir and hence subject to claims of his or her creditors.  Thus, it is an asset protection tool.

 How does it work? Generally, an inheritance is bequeathed to a trust for the benefit of an heir, and the heir is the trustee as to all issues except distribution of funds to himself or herself.  That is controlled by a "distribution trustee" whom the heir names (and can remove).  The distribution trustee has the discretion to distribute income and/or principal to the heir.  Thus, if a creditor of the heir comes forward and demands payment, the heir in effect refers the creditor to the distribution trustee who refuses to pay the creditor anything.  Since a creditor can only obtain what the heir himself or herself is entitled to, the beneficiary-controlled trust allows the heir to protect the inheritance from creditor claims - including, for instance, those of an ex-spouse.

 The beneficiary can in effect get as much of the trust assets for himself as he chooses, including the full amount.  Thus, this trust does not offer the protection for the beneficiary against himself that other trusts for, e.g., children or grandchildren provide.

 The beneficiary can be given broad power to appoint the trust property during life or at his death to whomever he chooses.  Generally, if he has not exercised this right, the trust will provide that the assets go on his death to his children or grandchildren.

 The beneficiary controlled trust can be set up by the beneficiary himself or by another donor such as his parent or grandparent.  If his parent or grandparent establishes the trust for his benefit, the trust can save estate and generation-skipping transfer taxes.  The trust agreement can provide for the trust to acquire assets for the beneficiaries’ use and enjoyment such as vacation homes, art, jewelry, and can authorize the trustee to invest in the business that the beneficiary can be employed by.

 The beneficiary control trust is gaining popularity.  It in essence gives the primary beneficiary nearly all the rights, benefits, and control over the trust property that a person would have with outright ownership – in addition to creditor and divorce protection not available with outright ownership.

 Jon


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