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November 06, 2003 at 07:00 PM
Designing The Trust To Maximize Results
Once it has been decided that a Beneficiary Controlled Trust should be used, the design of the trust to achieve and maximize the desired results becomes important.
In its simplest structure, the trust could be designed whereby the beneficiary would be the sole trustee and have the right to any or all of the income, plus access to principal limited to health, education, support and maintenance, plus a broad special power of appointment during life and/or at death to anyone other than the beneficiary, his creditors, his estate or the creditors of his estate.
However, in most instances this trust variation is not recommended because greater flexibility, tax benefits and creditor protection can be obtained using a discretionary Beneficiary Controlled Trust with multiple trustees.
By using friendly, independent trustees (or special trustees who could act under appropriate circumstances), certain powers can be woven into the trust agreement that could not exist if there were no independent trustees. This is so because powers that are rather innocuous in the hands of an independent trustee would cause tax and creditor problems if lodged in the hands of a beneficiary/trustee.
Use of an independent co-trustee generally is acceptable when one realizes that the grantor may have broad removal and replacement powers as long as the replacement trustee is not a “related or subordinate party” as defined in IRC 672(c). Alternatively, such power may be lodged in the hands of the beneficiary.
The basic philosophy of this article is that a transfer of property in trust improves the value of the property to the trust beneficiaries. The corollary of that thesis is that distributions from the trust, in the absence of a compelling reason to make distributions, such as onerous income tax consequences, should be avoided. The consequence of making distributions would be to move wealth from a tax and creditor protected environment into one that is exposed.
