In this solo episode of the Good Steward Law and Wealth Podcast, host Ledly Jennings explains beneficiary‑controlled trusts—also known as beneficiary‑deemed‑owner trusts (BDOTs). He defines the instrument, outlines two primary ways to create it (as a standalone trust or as a sub‑trust within a revocable trust that becomes irrevocable upon the grantor’s death), and details why families use it: to give beneficiaries full control while shielding assets from divorce, creditors, and bankruptcy. Jennings walks through a practical scenario involving his own family, describing a phased distribution model where assets are held in a common pot, then at age 25 a co‑trustee (mentor) assists the beneficiary until age 30, after which the beneficiary becomes the sole trustee. He emphasizes the importance of protecting assets for future generations and aligning the structure with the “good steward” philosophy of preserving wealth and values. The episode also covers key drafting and tax considerations: the high trust tax rate versus the beneficiary’s personal rate, the need to allocate income under IRC §678 so it is taxed to the beneficiary, and compliance with Secure Act 2.0 for IRA inheritances. Jennings stresses that a qualified attorney must draft the trust to include these provisions. Finally, he discusses non‑financial legacy transmission—using letters, reading lists, and trusted guardians to impart values—highlighting that the trust’s structure supports both financial and value‑based stewardship. The episode concludes with a call to action to contact his firm for further assistance.
Welcome to the Good Steward Law and Wealth Podcast, where host Ledly Jennings explores law and finance to help listeners become better stewards of their wealth. Each episode covers the latest trends and strategies in estate planning, elder law, investment, and wealth management. Tune in for the knowledge and tools for financial success and security.
Welcome to the Good Steward Law and Wealth Podcast. We're here again for a shorter form education. Educational episode, and today's topic is going to be a beneficiary-controlled trust and everything you need to know about it. So what is it? It's commonly also called a beneficiary, beneficiary-deemed owner trust, or a BDOT in the estate planning world. If you're talking with a drafter or an accountant, something like that, they may call it a BDOT. So if you hear that, that's what it is. But what is it? So it is a trust that a grantor or can set up for a beneficiary that the beneficiary is in control of. Um, easier said is an example, say I can set up a trust for my kid and my kid is the beneficiary of it and he is in charge of it. He's trustee. Now in my instance, my kid is 2 years old, so that's not possible. But just as an example, my parents could set up this type of trust for me, and I'm in charge of it, and I'm the beneficiary of it. Reasons you would do that— well, actually, first, so how is it formed? It can be formed in a standalone manner. So today, my parents could create this trust for me, put assets in it, and then basically they are my assets, but they are in a trust. So the reason for the grantor, or in this example, my parents, why would they do that? Well, maybe there's a reason to get assets out of their name, whether it's tax reasons, nursing home care reasons, or just simply they want to make a gift. And then why put it even in a trust? Well, it has a lot of benefits. It has asset protection benefits that we will get to, but the first way that it's formed, like I said, can be a standalone trust. The second way it can be formed is through a revocable trust. So we talked about previously a revocable trust. We talk about it in about every episode. It's, you know, basically a trust that I create for myself that I create while I'm living. The purpose of it is to avoid probate. But whenever I pass away, so my wife and I pass away, it can go to a trust for my kids. So our trust turns from revocable to irrevocable, and it's for our kids in a beneficiary-controlled trust if they're in charge of it and in control of it. So two ways it can be formed: standalone trust or through an existing revocable trust. Now, why would you even want to do it? Well, we said a second ago you may want to get things out of your name today while you're living for tax reasons, but let's talk about through a revocable trust. So whenever both, say in this example, my wife and I pass away and we leave things to our kids. Why would we want to leave it into a beneficiary-controlled trust? Well, it's a way to benefit your beneficiary and give them full control but have asset protection. So when I say asset protection, I mean from divorce, from creditors, bankruptcy, anything like that. Example, you have a, say, a family farm you want to leave to your kids, but you want to ensure it stays in the family. Then you leave it to your kids in a beneficiary-controlled trust. They are in charge of it. They use the farm as they want, but if they get a divorce, it does not go with the ex-spouse. It stays in the family. Same for asset protection. If for some reason they are in a car wreck and sued,, or bad business deal, have to file bankruptcy, something like that, whatever you left them stays with them in a protected manner. So that's why you would want to create a beneficiary-controlled trust, and it's, it's probably one of the best tools there is, and it relates really well to the good steward mantra of leaving things in the most effective manner because it gives the beneficiary the best control and full control really, that they can do what they want in a manner that is best for them and for the assets, but it's protected. So let's talk about how this forms in my everyday practice and why I set it up for a lot of families. So say we'll just continue with the example of me and my family. So my wife and I set up a revocable trust, you know, we want to make sure assets are placed in a manner that avoids probate when we pass away and goes on to our kids. So, we do that. We set it up in a revocable trust where we're trustees, we're in charge of it. You know, it's ours, we can change it whenever we want. But let's say something happens to us while our kids are still young. Let's say we have 2 kids under 10 and something happens to my wife and I and we're no longer around. Well, being a good steward is preparing our kids in the best way possible. Now, if we're around, we're going to hopefully train them, teach them about finances, teach them about values, you know, read the Bible, read different books, send them to school, get them education, prepare them for wealth that they may inherit. So when they are old enough and they're on their own, then they know how to manage their life in a good steward manner. But if we pass away and they're under 10, how do we, how do we prepare our kids for that? How, how can we ensure that they still live a good life and are raised properly and have all the advantages that they would have had if we were alive? Well, the answer is you can't prepare fully, but you can do your best to plan ahead and make good decisions. Now, the technical side is easy. Um, so that would be the method of the legal documents that set your kids up in the best manner possible. Now the other side is financial teachings, uh, imparting values on them, raising them. That is a lot harder to do even in real life while you're living, but especially if you're deceased, how do you do that? So first let's hit on the technical side. So this is the easy side. When my— so me and my wife are, um set up a revocable trust, and something happens to us. How do we leave it to our kids? Well, our favorite, my favorite manner is to leave it to them in a protected way. So let's say we have two kids, they're underage, we want to leave everything in a common pot for them that is managed by someone else. So whether it is a friend, a family member, their guardian, or even a bank trust department, we name a trustee that manages the money for them. And decides how it's invested, when distributions are made, you know, make sure they're fed, they're clothed, their school's paid for, whatever it is. Everything stays in one pot. They raise our two kids just like we would, um, and that stays in place till they are 25, just as a number to throw out there. Seems like a responsible year. Um, and then so when they're 25, we don't just say there's a million-dollar life insurance policy in there, we don't just cut them a check for $500,000 each. We say that the pot then divides 50/50, let's say, because one kid just graduated college and he's in the workforce, getting married, wants to buy a house, you know, his share goes in his own trust. The other kid may be in med school and has a lot more school to go for, and they want to pay for that school. So it may be that share goes in another trust for them. So it separates at 25. But I don't know about you, but I did not feel comfortable if I had a lot of money handed to me at age 25. It would have not had the best outcome that it could have. It could even be dangerous and wasteful. So we don't want to hand them the keys outright at 25. So what we do is at age 25, they have a co-trustee, meaning they— my kids would be in charge. They could make decisions. They can decide how it's invested, how it's distributed. But they have supervision. So they have someone there still acting as co-trustee, acting like a co-pilot in that cockpit with them, making sure they don't make a mistake, and they're supervised. And the benefit and thought of this is for the age 25 to 30 is what we said that co-trustee is in place. So for those 5 years, they have a mentor, a trainer, a guide that can hopefully teach them and guide them into how to invest the money, how to best use it, and just so they're not completely thrown in the fire and get a lot of money all at once. You know, it's a spread out portion from 25 to 30. Now at 30 is what we're talking about today. They become their own trustee. Ideally, they've had that mentor period, they're ready for it, they're responsible, they're mature. So there's no need for someone else to be involved. It can be them. So they are their own trustee. It is now a beneficiary-controlled trust, meaning they make all the decisions. They decide how it's invested, how things are distributed, and what they do with it. But it's protected. So it is completely protected from divorce. So the one son got married, gets a divorce, whatever we left him stays with him. The other example, kid graduated med school now and is a doctor. She is sued for malpractice, let's say. Anything we left them in this trust is protected from those lawsuits. So why— I always ask clients, why not leave it to someone in a manner— this is how I would want to be left something in a way that I'm in charge of, I get the full benefit from, but it's protected. So, that's really a good steward mentality of leaving things in the most efficient manner to allow us to achieve our highest and best use. Now, that's the technical side. I told you that's the easy part. But how do you prepare them for the money other than the mentor and the coach, the co-trustee I mentioned? Their job is to help them and guide them. But what about the other stuff? How do you impart your values on them? How do you teach them things you would have taught them had you been living? Well, that, that is a hard answer, something we could dive into a lot. But one thought that we do and that I have is for clients, you kind of prepare a guide and some letters for your kid. Maybe you think you value entrepreneurship or personal finance. You know, you may want them to read a book about the value of compounding in a Roth IRA. So you make a list of books that you want them to read before they become their own trustee. That book could be the Bible, that book could be Tony Robbins, you know, whatever it is, something that you found value in that you want them to learn and reach before they become their own trustee. Now, that's not a foolproof method for making sure they're raised properly. That's why you name guardians that you trust will raise your kids as you would have raised them. But it helps, and it's a, it's a good way to share your values that you lived your life by while you were living with your kids. Something for them to look back on for years and even share with their kids. So that's the hard part, is passing on the values. But the beneficiary-controlled trust sets it up in a manner that is the most efficient for that. A couple of technical points I want to hit on drafting-wise. You need to make sure a qualified attorney has drafted this type of trust because you may— I have a lot of clients that come in and say, well, my dad had a trust 20 years ago and it was about 3 pages. Why, Ledly Jennings, is your trust about 70 pages? Well, stuff like this is exactly why that you have to include proper provisions to efficiently plan for taxes, for whatever it may be. One example is a beneficiary-controlled trust. It could be taxed at a trust rate. So there are two different tax rates for things. If it's in a trust, it's taxed at the highest rate, which I believe is 37% right now. So any income the trust makes is taxed at 37%. Now there's the other tax rate that the beneficiary has their own tax rate. So at a 25-year-old, you're probably not making enough money to be at the highest tax rate. So maybe your tax rate is 15% or whatever it is. America has that progressive tax rate that the more money you make, the more taxes you pay. So what we want to do is draft the trust in a way that separates the income it produces to where they do not have to pay the 37% tax rate. The income that it produced can be taxed to the beneficiary personally, but it stays in the trust and you still get that asset protection. This is especially relevant when it comes to IRAs that you leave to a trust. So I won't exactly go into the details. You need to read IRS Section 678 is where the code that generates this thought from, but you just need to make sure it's drafted in a way that has the proper tax implications. You cannot just leave something to a trust that your kid is the beneficiary of without planning ahead in this way. So we will dive into that a lot more in future episodes, especially as it relates to IRAs, but generally, um, that is kind of what we're looking at. And then another thing that has to be drafted specifically— you probably hear a lot about Secure Act 2.0 and the new changes that come with that. It was just enacted fully a couple months ago and clarified. So a trust has to be drafted to meet the standards of Secure Act 2.0 when it inherits an IRA, and there's specific clauses that need to go in this. So there's a lot that goes into drafting these trusts, but that's how you get the benefits and the best tool there is of a trust that is controlled by the beneficiary and protected. So the takeaway is, why not leave something to your kids in a manner that they are in charge of, they have complete control over, but it's protected from divorce and creditors? And There we go. That's it. That's been this episode of the Good Steward Law and Wealth Podcast. Thank you for listening.
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