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:
- Before you die, or
- 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.
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.
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