The Holy Grail of Control: The BDIT Strategy
The Holy Grail of Control: The BDIT Strategy
Asset protection usually requires giving up control. Not anymore. How to use a “Beneficiary Defective Inheritor’s Trust” to lock assets in a tax-free vault while keeping the keys in your pocket.
Executive Summary
- The Impossible Wish: Every wealthy client asks: “Can I put my assets in a trust to avoid estate taxes and lawsuits, but still be the Trustee and spend the money?” Traditionally, the answer was “No.” (Self-Settled Trusts have limitations).
- The BDIT Hack: Instead of you setting up the trust for yourself, a third party (e.g., a parent) sets up a trust for you with a nominal gift ($5,000). Because you did not establish it, it is a “Third-Party Trust.”
- The Sale: You then sell your business or assets to this trust in exchange for a Note. You are the Beneficiary, the Investment Trustee, and you can manage the assets. But legally, the assets belong to the trust, shielding them from your estate tax and creditors.
The “Crummey” Mechanism
The Secret Sauce: To make you the “owner” for Income Tax purposes (so you can pay the trust’s taxes and let it grow tax-free), the trust gives you a temporary right to withdraw the initial $5,000 gift (Crummey Power). You let this right lapse. Under IRC Section 678, this lapse makes you the tax owner (Grantor) solely for income tax, while remaining a beneficiary for estate tax purposes.
Mechanic: The Ultimate “Have Your Cake” Structure
Simulation: Entrepreneur’s Exit ($20M Business Sale)
| Feature | IDGT (Standard Freeze) | BDIT (678 Trust) |
|---|---|---|
| Beneficiary | Your Children/Spouse | YOU (The Client) |
| Who sets it up? | You | Parent/Third Party (Nominal) |
| Asset Protection | Good | Superior (Not Self-Settled) |
“The BDIT allows you to say: ‘That trust isn’t mine (so you can’t tax or sue it), but I control the investments and I’m the primary beneficiary (so I can enjoy it).’ It exploits the dissonance between tax law and property law.”