Beneficiary Controlled Asset Protected Irrevocable Trusts

by Arizona estate planning attorneys Richard Keyt (Rick, the father) and Richard C. Keyt (Ricky, the son)

This article is for people who are considering giving valuable assets to their loved ones before and after death.  There are two ways you can transfer your valuable assets to another person.

• Unprotected way.  This occurs when the current owner transfers ownership of assets to another person.  If the new owner gets sued the creditor may get the assets.  If the new owner gets married and divorced the ex-spouse may get one half of the assets.  If the new owner files for bankruptcy, the bankruptcy trustee gets the assets.

• Asset protected way. This occurs when the current owner transfers ownership of the assets to an irrevocable beneficiary controlled asset protected trust (a BCAPT) the beneficiary of which is the child or loved one.  If the beneficiary gets sued the creditor cannot get any of the assets because the beneficiary does not own the assets in the trust.  If the beneficiary gets married and divorced the ex-spouse cannot get any of the assets because the beneficiary does not own the assets in the trust.  If the beneficiary files for bankruptcy, the bankruptcy trustee cannot get any of the assets because the beneficiary does not own the assets.

When assets are owned by a BCAPT of which your child or loved one is the beneficiary the assets cannot be reached or obtained by any of the following:

• the beneficiary's creditors
• the beneficiary's ex-spouse
• a bankruptcy court

Unprotected Example:  Recently a man who had a large judgment called me and said he inherited $250,000 when his mother died.  She left him the money outright.  When he deposited the money in his bank account all of it went to the man's judgment creditor who had garnished the bank account.

Asset Protected Example:  If the man's mother had left the $250,000 to the man in a beneficiary controlled asset protected trust the creditor could not have gotten any of the money because legally the $250,000 would have been owned by the trust, not by the man.  The trust could have bought a home and the man could have lived in the home rent free or rented the home.  The man as trustee of the trust could have used the rental income to pay his bills.

Should You Create a BCAPT?

Whether to use a BCAPT is a no brainer.  As estate planning attorneys we recommend that all people who have assets with substantial value use a BCAPT to leave assets while alive or on death to their children and loved ones.  You have two options as to when you create a BCAPT:

1. Before you die, or
2. After you die.

If you want to create a BCAPT now, go to our BCAPT questionnaire.  If you want to create the BCAPT when you die or both you and your spouse die, hire us to prepare a revocable living trust for you now.  When we create an estate planning revocable living trust our trust agreement provides that on the death of the sole trust maker / beneficiary or on the death of the second spouse when the trust is a joint trust a BCAPT will be created for each person who inherits your assets.  See the contents and prices of our estate plan with a revocable living trust.

Trust Terms

The terms commonly used in connection with trusts are:

• Trust maker, trustor, donor, grantor or settlor:  These terms all refer to the person or people who create the trust.

• Trustee or co-trustees: This is the person, people or trust company that has control of assets in the trust.  The trustee invests trust assets and determines how much and when to spend trust assets and makes distributions of trust assets to or for the benefit of the beneficiary.

• Beneficiary: This the person for  whom the trustee manages and administers the trust's assets.  The beneficiary can be both a trustee and beneficiary as the same time.

Trust Example:  The trust has $500,000 in its bank account.  Bart Simpson is the trustee and beneficiary.  Bart causes the trust to buy a home for $400,000.  The trust owns the home.  Bart lives in the home rent free.  The trust pays the property taxes each year.  After a while Bart decides causes the trust to sell the home.  The money goes in the trust's bank account.  Bart takes some of the money and buys a rental property.  The trust is the landlord that rents the home.  The rent goes into the trust's bank account.  Bart has the trust rent a car for him and pay the monthly lease payments.

Revocable Trust vs. Irrevocable Trust

A revocable trust is a trust that can be amended or terminated by the trust maker, trustee, beneficiary or a third party.  The BCAPT is an irrevocable trust because the BCAPT cannot be amended or terminated by the trust maker, a trustee, a beneficiary or a third party.  Only irrevocable trusts like the BCAPT provide asset protection for the beneficiary.

Trustee

If the beneficiary is a minor, too young to be the trustee or if the child should never be the trustee for any reason such as the child has a drug or alcohol problem the trustee can be another trusted family member or a trust company.  It is common for parents who create a BCAPT for a minor child to allow the child to become the trustee at a stated age such as 25 or 30.  The beneficiary who is also the trustee can use trust assets for his or her for health, education, maintenance and support.  The following text is from a discussion in a legal treatise frequently cited by court and is based on the Restatement Third, of Trusts §50, Comment d(2)):

“A support standard. . . ‘ordinarily entitles a beneficiary to distributions sufficient for accustomed living expenses, extending to such items as regular mortgage payments, property taxes, suitable health insurance or care, existing programs of life and property insurance, and continuation of accustomed patterns of vacation and of charitable and family giving. Reasonable additional comforts or ‘luxuries’ that a special vacation of a type the beneficiary had never before taken, may be borderline as entitlements but would normally be with the permissible range of the trustee’s judgment, even without benefit of a grant of extended discretion. . . . A support standard normally covers not only the beneficiary’s own support but also that of persons for whom provision is customarily made as a part of the beneficiary’s accustomed manner of living. This generally includes the support of members of the beneficiary’s household and the costs of suitable education for the beneficiary’s children. . . . the terms ‘support’ and ‘maintenance’ do not . . . authorize distributions to enlarge the beneficiary’s personal estate or to enable the making of extraordinary gifts.'”

The beneficiary who is the sole trustee may consider the beneficiary's other sources of income or support.

Maximum asset protection arises when the trust has two trustees, the beneficiary and another independent person (the beneficiary's friend) or a trust company.  The beneficiary determines how to invest the trust's assets and the other trustee has the  power to make distributions in the co-trustee’s sole and absolute discretion.  The beneficiary has the power to fire the distribution trustee and replace the distribution trustee with a new distribution trustee with an unrelated party who is not a subordinate employee.

The beneficiary can have a limited power of appointment to appoint trust assets to anyone except the beneficiary, the beneficiary's estate, the beneficiary's creditor or the creditors of the beneficiary's estate.  Our trust agreement also opts out of the prudent investor standard, which means the trustee can invest in any asset without the diversification requirement.

Initial Beneficiary

When the BCAPT is created, it has only one beneficiary.  The initial beneficiary is the person who would be the recipient of the assets transferred to the BCAPT if you did not create the trust.  The BCAPT provides the trust will exist for the life of the beneficiary unless it runs out of assets.  The BCAPT states what happens to the trust if the beneficiary dies.  The trust maker(s) tell us what happens if the beneficiary dies and we insert the appropriate language in the trust agreement.

What Happens if the Initial Beneficiary Dies?

Here are some common options available to the trust maker(s) with respect to who will become a new beneficiary on the death of the initial beneficiary:

• Assets are divided equally among the initial beneficiary's children.  The initial beneficiary has two children and both of them are alive when the initial beneficiary dies.  A BCAPT is created for each child and it is funded with 1/2 of the assets in the trust on the initial beneficiary's death.

• Assets go to initial beneficiary's living children and the children of a deceased child.  The initial beneficiary has two children, but child 1 dies before the initial beneficiary.  Child 1 has two children, i.e., grandchildren of the initial beneficiary.  Both grandchildren are living when the initial beneficiary dies.  A BCAPT is created for child 2 and each of the grandchildren.  Child 2's trust is funded with 1/2 of the assets in the trust on the initial beneficiary's death.  Grandchild 1 and Grandchild 2's trusts are funded with 25% of the assets in the trust on the initial beneficiary's death.

• Assets are divided unequally among the initial beneficiary's children.  The initial beneficiary has three living children all of them are alive when the initial beneficiary dies.  A BCAPT is created for each child.  Child 1's trust is funded with 50% of the assets in the trust on the initial beneficiary's death. Child 2 and Child 3's trusts are funded with 25% of the assets in the trust on the initial beneficiary's death.

• One or more of the initial beneficiary's children get nothing.  The initial beneficiary has three living children.  A BCAPT is created for child 1 and child 2, but not for child 3.  Child 1's BACPT gets one half of the assets in the trust on the initial beneficiary's death.  Child 2's BACPT gets one half of the assets in the trust on the initial beneficiary's death.  Child 3 gets nothing.

• Initial beneficiary's siblings get assets.  If the initial beneficiary dies without any descendants then the assets in the trust on the initial beneficiary's death go to BACPTs created for one or more of the initial beneficiary's siblings named in the trust agreement.

• Third party or parties get assets.  If the initial beneficiary dies the assets go to the American Red Cross or one or more unrelated people named in the trust agreement.

• Initial beneficiary determines who gets the assets.  The initial beneficiary has a power of appointment that give him or her the option to name who will become the future beneficiary or beneficiaries on the initial beneficiary's death.  If you instruct us to put this option in the trust agreement then you will be giving the initial beneficiary the power to alter your plan as to who will be a future beneficiary of the BCAPT.

Federal Gift Tax Implications

Book a Free Estate Plan Consultation

Warning for Arizona Residents

The State of Arizona has a law that specifies who inherits the assets of Arizona residents who die without a will or a trust.  This law may cause your assets to be inherited by the wrong person or people if you lack a will or trust.  To learn who will inherit your assets if you die without a will or a trust see my article called "Who Inherits Your Property If You Die without a Will or a Trust" and take my short online quiz called "Who Inherits Your Property."  If the wrong person or people would inherit your assets you need to hire us to prepare a will or a trust that leaves your assets to the person or people you want to inherit the assets, not to the people Arizona gives your property to.

Why You Need an Estate Plan with a Trust

See our article called “15 Benefits of Having an Estate Plan with a Revocable Living Trust.”  Learn the 31 documents and services you will get if you hire us to prepare your estate plan with a revocable living trust.

Book a Free Consultation

The first step to protect your assets and ensure they go to your desired heir(s) is to book a free office, phone or Zoom video consultation with one of our estate planning attorneys. During this no-obligation meeting, they will answer your questions and design your estate plan. Make a free appointment with:

• Richard Keyt (Rick, the father) text or call 24/7 at 480-664-7478 or go to his online calendar. See Rick's virtual business card.
• Richard C. Keyt (Ricky, the son) text or call at 480-664-7472 or go to his online calendar.

Steps to Hire Us

1.  Have your free consultation with one of Keyts.

2. Complete our online estate plan questionnaire. When you submit the questionnaire our system will send an email message to you and to us that contains all the information you entered into the questionnaire.

3. Attend your free estate plan consultation.

4. Come to our office to sign your documents in front of two witnesses and a notary.

Total time from start to signed documents is one to two weeks.