Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Financial Planning > Trusts and Estates > Trust Planning

The Beneficiary Controlled Trust Allows Many Options

Your article was successfully shared with the contacts you provided.

The Beneficiary Controlled Trust Allows Many Options


Suppose youve been advised that your wealthy great uncle recently has passed away. Being his favorite nephew, he has left you a sizeable inheritance. Would you rather receive this inheritance in the form of an outright gift or receive it in trust?

If given the choice, most clients quickly would choose an outright inheritance. At first blush, this makes sense. After all, if given a choice, we want full, unfettered access to money. Consequently, an outright inheritance seems the logical way to go. But let us throw in a twist. What if you not only enjoyed unfettered access, but also with a little planning could enjoy divorce, tax and creditor protection?

Specifically, the Beneficiary Controlled Trust allows clients all of these options that otherwise are unavailable with outright ownership. Think of it as having a great deal of control, with some pretty nice side benefits to boot.

From the grantors perspective, the Beneficiary Controlled Trust is much more attractive than an outright gift. No longer is there a fear the inheritance will be invaded by the “evil son-in-law,” the creditors of the childs new start-up business or some other creditor lurking in the future. From the beneficiarys perspective, he or she has virtually unlimited control of the trust without interference from any secondary beneficiaries.

How it works. Many of our clients want to leave their property to their loved ones outright, provided that at the time of the gift or bequest the desired recipient is capable of managing the property wisely. For these clients, Beneficiary Controlled Trusts generally are recommended rather than outright transfers.

This concept is fairly simple. It is a trust where the primary beneficiary either is the sole trustee or has the ability to fire any co-trustee and select a successor co-trustee. Typically, control of the trusteeship is coupled with a broad special power of appointment that can have the effect of eliminating any potential interference by remote beneficiaries. Because the primary beneficiary/trustee possesses the ability to eliminate all participation in the enjoyment of the trust assets by secondary and remote beneficiaries, the latter will not be inclined to interfere because their rights could be eliminated.

The Beneficiary Controlled Trust is designed to provide the primary beneficiary with all of the rights, benefits and control over the trust property that he would have had he owned it outright, in addition to tax, creditor and divorce protection benefits that are not obtainable with outright ownership.

The ability to derive more benefits in a trust than one would obtain with outright ownership without giving up control leads one to wonder why trusts are not the vehicle of choice in virtually every estate plan and why Beneficiary Controlled Trusts are not used instead of outright transfers in almost every instance in which the transferor otherwise would be inclined to gift or bequeath the property outright.

Furthermore, if this philosophy makes sense for the first generational level of descendants, it logically follows that the trust should be designed as a dynasty trust so that more remote descendants also are given these benefits and protections.

Of course, it goes without saying that funding the trust with a life insurance policy provides a tremendous leveraging opportunity for your clients.

Funding the trust with a life insurance policy allows for the trust to receive an income-tax-free death benefit. The trust, as we have described, provides creditor, divorce and tax protection. Moreover, the death benefit remains out of the beneficiarys estate and (if desired) can include dynastic provisions that allow the trust to last for several generations. Not a bad accomplishment for a relatively simple planning technique.

Where it Doesnt Work. While appropriate in a wide variety of situations, the Beneficiary Controlled Trust is not a panacea in all circumstances. For instance, the strategy is not appropriate when the primary beneficiary is a minor and legally incapable of having responsibility. In that case, the trust would become a Beneficiary Controlled Trust upon the primary beneficiary attaining the desired age.

Likewise, those beneficiaries who are “practically” incapable or unable to assume the managerial responsibility of the trust are not good candidates. Examples of this include an “irresponsible child,” or a child who might have mental disabilities. In addition, the client might want to impose limitations on the primary beneficiarys ability to enjoy or distribute the trust property without restriction. Yet even in these circumstances, transferring an inheritance into a trust is superior to an outright gift.

Solutions, Solutions, Solutions. Successful producers do not “push product” but rather offer compelling solutions for their clients problems. The Beneficiary Controlled Trust offers clients an attractive solution that they would not normally enjoy with a traditional outright gift or bequest. In the highly competitive estate planning market, this simple strategy provides you with a powerful estate planning solution for many clients, not to mention a great sales idea!

Daniel J. Munroe, JD, CLU, is director of advanced marketing for MONY Partners, Hartford, Conn. He can be reached at [email protected].

Steve Oshins, Esq., is a partner with Oshins & Associates, P.C., Las Vegas, NV. He can be reached at [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, November 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.