The Holy Grail of Control: The BDIT Strategy
The Holy Grail of Control: The BDIT Strategy
Most irrevocable trusts force you to give up control to save taxes. The “Beneficiary Defective Inheritors Trust” (BDIT) allows you to move assets out of your estate while keeping 100% control, access, and enjoyment.
Executive Summary
- The Dilemma (Tax vs. Control): To avoid the 40% Estate Tax, you usually have to gift assets to an Irrevocable Trust. The problem? You legally lose ownership. You can’t spend the money, and you often can’t be the Trustee. Rich people hate this loss of control.
- The Solution (BDIT): A BDIT is a trust set up by a third party (e.g., your parent) *for you*.
👉 The Magic: Because *you* are the beneficiary, not the grantor, you can serve as the **Trustee**. You control the investments, you can fire the other trustees, and you can even enjoy the assets (like living in a house owned by the trust) without triggering estate tax. - The “Defective” Burn: The trust is designed so that *you* pay the income tax on the trust’s earnings (Section 678). This is a feature, not a bug. By paying the tax personally, you allow the trust’s assets to grow **tax-free** and compound faster outside your estate.
The “Seed Money” Requirement
The Critical Step: You cannot set up a BDIT for yourself (that creates a taxable “Self-Settled Trust”).
👉 The Mechanism: A third party (e.g., a parent or grandparent) must establish the trust with a nominal “Seed Gift” (e.g., $5,000).
👉 The Sale: Once established, you *sell* your assets (business, real estate) to the BDIT in exchange for a Note. This freezes the value. The appreciation happens inside the trust, forever outside your estate.
Mechanic: Have Your Cake & Eat It Too
Simulation: Transferring a $10M Business
| Feature | IDGT (Intentionally Defective Grantor Trust) | BDIT (Beneficiary Defective Inheritors Trust) |
|---|---|---|
| Established By | You (Grantor) | Third Party (Parent) |
| Beneficiary | Your Children/Spouse | YOU (The Client) |
| Trustee Control | Limited (Risk of Inclusion) | Full (Safe Harbor) |
“The BDIT is the only vehicle that allows you to say: ‘I own nothing, but I control everything.’ In the US legal system, ownership is a liability (taxes/lawsuits), but control is an asset. The BDIT separates the two perfectly.”