Creating Wealth in the 'Overlooked' Defective Beneficiary Trust

Hopson, James F.; Koehn, Jo Lynne; Hopson, Patricia D.
December 2008
Journal of Financial Planning;Dec2008, Vol. 21 Issue 12, p44
Academic Journal
• Defective irrevocable grantor trusts are a common tool for estate planners, but the income-tax defective irrevocable beneficiary trust is often overlooked or unfamiliar to estate planners. • The irrevocable beneficiary defective trust treats trust property as owned by the beneficiary for income-tax purposes, but not for gift- and estate-tax purposes and, if elected, is not subject to the generation-skipping transfer tax. Therefore, for income-tax purposes, the trust income is taxed to the beneficiary (deemed the owner") instead of the trust. • Advantages of the defective beneficiary trust include favorable income-tax and estate-tax treatment for the trust, ability to pass the trusts beneficiary interests to multiple generations without estate tax, and tax-free transfers between the trust and the trust's owner Additional advantages include asset, creditor and divorce protection; access by the trustee to the trust's income and principal, along with the trustee beneficiary's right to manage and control the trust assets; plus the right to name successor beneficiaries. One of the greatest advantages of the defective beneficiary trust is the ability of the beneficiary to shift business opportunities to the trust, which can produce sizeable wealth generation inside the trust.


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