Beneficiary Defective Irrevocable Trusts

An increasingly popular trust for estate, gift, and income tax planning purposes is called a beneficiary defective irrevocable trust (BDIT). 

To illustrate how a BDIT operates, imagine a mother creates a written BDIT where her son and grandchildren are the trust beneficiaries.  The trust is designed purposely so that the trust is “defective” for income tax reasons as to the son.  The heart of the BDIT trust planning is to enable the son to be a trust beneficiary of the BDIT to which the son sells his apartment building.  The son then sells the apartment to the BDIT for the purpose of asset protection for the apartment, to freeze and avoid having any future appreciation value of the apartment, and so that the son can receive distributions from the trust. 

The term “defective” trust means all trust income, gains, losses, deductions for the BDIT trust are reportable on the son’s own personal income tax return Form 1040.  These items are not reportable each year on a separate trust income tax return. 

See BDIT: What is a Beneficiary Defective Irrevocable Trust? James M. Kane Legal Blog, Nov. 14, 2014.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.