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Beneficiary Deemed Owner Trusts Under IRC 678(a)(1): Using BDOTs for Income Tax Savings and Simplification

Shifting Income Tax To Beneficiaries and Away From Fiduciaries, Preserving Deductions, and Choosing Estate Inclusion

Recording of a 90-minute CLE/CPE video webinar with Q&A

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Conducted on Tuesday, October 4, 2022

Recorded event now available

or call 1-800-926-7926

This course will provide a comprehensive and practical guide to structuring a beneficiary deemed owner trust (BDOT). The panel will discuss the provisions of Section 678 in depth, detail the income tax benefits of granting beneficiaries' withdrawal rights over trust income but not principal, and distinguish BDOTs from beneficiary defective inheritor's trusts and other similar structures.

Description

Structuring a trust as a BDOT can provide significant income and transfer tax savings by taking assets out of the fiduciary tax regime while allowing beneficiaries a degree of control and access over trust income. The BDOT is a trust that grants beneficiaries the power to withdraw taxable income.

Section 678 generally provides that a trust beneficiary shall be treated as the trust owner if the beneficiary has the power to withdraw either corpus or income. Vehicles such as beneficiary deemed inherited trusts are built on the combination of a beneficiary's right to withdrawal and a limiting Crummey lapse.

Structured properly, a BDOT can preserve several crucial income tax deductions lost or limited due to the 2017 tax reform law. Also, counsel can ensure enhanced asset protection when drafting a BDOT. As with every wealth transfer mechanism, a BDOT carries some risks, particularly around the definition of trust income subject to withdrawal power. Estate planners must understand the potential risks in utilizing a trust under IRC 678.

Listen as our panel provides a practical guide to achieving income tax savings and beneficiary control over trust assets through a BDOT.

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Outline

  1. IRC 678 provisions
  2. Structuring beneficiary power to withdraw income to shift taxation to a beneficiary holder
  3. Differentiating between BDOT income withdrawal and beneficiary deemed inheritance trust
  4. Specific benefits and advantages of BDOTs
  5. Drafting considerations and risks to avoid

Benefits

The panel will review these and other relevant topics:

  • How to accurately define "income" for Section 678 purposes to ensure that a beneficiary's power to withdraw income only without invading principal effectively shifts taxation from the trust to the holder of the power
  • Specific tax advantages found in well-structured BDOTs
  • Steps to enhance asset protection within a BDOT structure
  • Using BDOTs in conjunction with other trust vehicles

Faculty

Betheil, Blake
Blake G. Betheil
Partner
Nelson Mullins Riley & Scarborough

Mr. Betheil's practice primarily focuses on estate planning and asset protection planning for a wide array of...  |  Read More

Holloway, Maurice
Maurice D. Holloway
Partner
Nelson Mullins Riley & Scarborough

Mr. Holloway has experience in the formation of corporations, partnerships, and limited liability companies;...  |  Read More

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