This is another rung on the ladder of estate planning and trusts. Keep in mind that one misstep could send you down to the bottom of the board again – Similar to the children’s game of Chutes and Ladders. If properly planned, the DAPT can turn into something called a beneficiary defective inheritor’s trust, or a BDIT. This is how it works: Someone other than the doctor will set up the trust. When this is done and no gifts are made to the trust by the doctor, many of the rules associated with estate taxes will not apply. For example, if assets are given to the trust and the client retains the right to enjoy the assets that are transferred, the entire amount of those assets will be added to the estate.
Let’s say that the doctor has set up his trust in a state that allows self-settled trusts. If the doctor is not the grantor setting the trust up, the BDIT does not have to be in any particular state. So, this means that the trust can continue for as long as state laws allow. Now, there is a little twist to this. If someone else sets up the trust, how will it then be a grantor trust that will allow the doctor to avoid capital gains on the sale of any of the assets? Like the trust with the pair of deuces, there is a technique that can be used to create some income-tax magic. The designer of BDIT, states,”The tax law provides that if a person other than the grantor can vest all of the principal of the trust in himself, then he’ll be treated as the owner of the trust for income tax purposes.” In simple terms, if someone else puts annual gifts into the trust and the doctor retains the power to pull out those gifts, the trust will then be a grantor trust to the doctor, even though he did not set it up himself. The great benefit to this is that the doctor can sell valuable assets to the trust without triggering capital gains!
Since the doctor did not set up the trust, but it was done by someone else, he will be given more control over the trust and will have a much less tax and asset protection risk than if he had done all the work and set up the trust himself. In addition, Dr. Smith may also be given the right to appoint the trust assets that remain when he dies in any manner or fashion he wishes.
The type of trust that is selected by a client is a major concern for financial planners. An expert on asset protection planning should let you know that if the trust will be taxed as a grantor trust, this could possibly influence which of the assets should be transferred to that trust. It will also determine which ones should not be transferred.
It is important to know the the tax status of the grantor, as well as the beneficiaries will be relevant information when making an investment decision. If the trust is located in the client’s state of residence, that will also have an impact on the decision. While it may sound complicated, trust planning is actually extremely flexible. With some thought and effort, a financial planner can work with clients and other advisors to choose the optimal trust for the situation. As a financial planner, you can then handle the investments and any other components of the plan in a manner that will maximize the benefits of whatever trust has been selected.