Beneficiary Defective Inheritor’s Trust (BDIT)

A Beneficiary Defective Inheritor’s Trust (BDIT) is a sophisticated estate planning tool designed to allow an individual, typically referred to as the beneficiary, to receive the benefits of a trust’s assets while maintaining significant control over those assets, all without being included in their taxable estate.

The trust is “defective” for income tax purposes because it is structured to treat the beneficiary as the grantor under IRS rules, allowing the beneficiary to pay income taxes on the trust’s income while the trust assets continue to grow tax-free for estate tax purposes.

The creation of a BDIT generally involves a third party, such as a parent or other family member, who initially funds the trust with a nominal contribution. The beneficiary then enters into transactions with the trust, such as selling assets to the trust in exchange for a promissory note, enabling the transfer of wealth to the trust without triggering gift or estate taxes. This structure offers several advantages, including asset protection from creditors, control over trust distributions, and the ability to minimize transfer taxes.

A BDIT is particularly valuable for high-net-worth individuals looking to preserve and grow wealth for future generations while maintaining flexibility and control over trust assets during their lifetime.