What is a Beneficiary Controlled Asset Protected Trust?
A Beneficiary Controlled Asset Protected Trust aka a Gift Trust is an irrevocable trust created by a person (a parent for example) called a “trustmaker” who wants to create a life-time asset protected beneficiary controlled trust for a loved one (a child for example). The trustmaker will typically make gifts to the trust while alive and after death. The advantages of the BCAPT are:
- Assets in the trust are protected for the life of the beneficiary from the beneficiary’s creditors, ex-spouses and predators.
- The beneficiary can have the maximum control over the assets permitted by law without causing the trust assets to be included in the estate of the beneficiary after the beneficiary’s death or to be reachable by the beneficiary’s creditors including a bankruptcy court if the beneficiary were to file for bankruptcy.
- Income earned by the trust is not taxable to the trustmaker. Instead, trust income distributed each year to or for the benefit of the beneficiary is taxable to the beneficiary and the trust must file an income tax return and pay income tax on income that is retained in the trust.
- After the beneficiary’s death assets can be held in the BCAPT for descendants or other people named by the deceased beneficiary.
The BCAPT is an irrevocable trust, which means that the trust cannot be amended after it is created without court approval. We include language in our BCAPT ‘s that give a trust advisor the power to modify the trust agreement to comply with future changes in the applicable law.
Most people who create a Beneficiary Controlled Asset Protected Trust will include language that if the initial beneficiary dies the trust assets will be held in trust for the descendants of the deceased beneficiary, but if there are no descendants then the assets would go to siblings of the deceased beneficiary or other loved ones in trust.
Why an Outright Gift of Property to Loved Ones is a Mistake
Many people give money and valuable property to their loved ones outright instead of leaving assets in an asset protected trust. I will never forget a 2005 five day seminar I attended in Las Vegas on Wills, trusts and estate planning. Two of the days were taught by a great estate planning attorney and educator named Cecil Smith of Tennessee. Cecil said then that he had prepared over 10,000 estate plans. He told a story about his mother who said, “Cecil, I redid my Will and you get all of my property on my death.” Cecil said, “Mom, don’t you love me? If you love me then you should leave your property to me in a trust that gives me life-time asset protection.”
Cecil’s point is very important. Nobody should ever give valuable property to loved ones unless they do it by transferring ownership of the property to the trustee of a trust of which the loved one is a beneficiary and that gives the loved one life-time asset protection from creditors, ex-spouses, bankruptcy court and predators.
| $100,000 to Bart Simpson | Outright Gift | Gift to Gift Trust |
|---|---|---|
1. Bart is single, no creditors & responsible with money | Bart invests money wisely and it grows over time. | Trustee invests money wisely and it grows over time. |
2. Bart is single, no creditors & spends money as soon as he gets it. | Bart buys a new Corvette, takes his girlfriend to Europe for a month and blows through the money in six months | A trustee who is responsible with money controls distributions to Bart and prevents him from blowing it. $100,000 appreciates in value. |
3. Bart is single, no creditors & responsible with money, but runs a red light & kills a person five years after the gift & the victim’s family gets a judgment against Bart for $1,000,000 more than his insurance coverage. | Creditor gets the $100,000 plus the appreciation earned on the money. | Creditor gets none of the $100,000 or its appreciation in value. Because Bart does not own the $100,000 or any of its appreciation his creditor cannot get any of it. |
4. Bart is single, no creditors & responsible with money. Five years after receiving the gift he marries Barbie. Bart adds Barbie to the investment account in which he invested the money and turns the separate property into community property. Bart was unaware that adding Barbie to the account was a gift to her of one half of its value. They divorce. | Barbie gets one half of the $200,000 ($100,000 plus $100,000 in appreciation over 10 years) in the investment account. | Barbie gets none of the $100,000 or its appreciation in value. Because Bart does not own the $100,000 or any of its appreciation his ex-spouse cannot get any of it. |
5. Bart is single, no creditors & responsible with money. Five years after receiving the gift he marries Barbie. Bart is careful not to convert his separate property investment account into community property. They divorce. | Although Bart is not legally obligated to give Barbie any of his separate property investment account he becomes sick and tired of dealing with Barbie in the divorce and gives her one half of the $200,000 ($100,000 plus $100,000 in appreciation over 10 years) in the investment account just to make her go away and get the divorce behind him. | Barbie gets none of the $100,000 or its appreciation in value. Because Bart does not own the $100,000 or any of its appreciation his ex-spouse cannot get any of it. |
6. Bart is single, no creditors & responsible with money. Five years after receiving the gift Bart files for bankruptcy. | The Bankruptcy Court gives the $100,000 plus the appreciation earned on the money to Bart’s creditors. | Creditors get none of the $100,000 or its appreciation in value because Bart does not own any of it. |
7. Bart is single, no creditors & responsible with money. Five years after receiving the gift Bart becomes an alcoholic or a drug addict. | Bart quickly burns through all of the money. | If Bart is not the trustee all of the $100,000 plus its appreciation in value will be safe from Bart’s bad habits. |
How Does the Beneficiary Benefit from the Trust When He/She has a Judgment Creditor?
The biggest reason to give valuable property to your loved ones in a BCAPT that provides life-time asset protection for the beneficiaries is to keep the property out of the hands of your loved one’s judgment creditor. Although your loved one may not have a creditor problem the day you make the gift, he or she could have a creditor problem later in life. We live in a litigious society so why not protect your loved one from a future disaster and make your gift to a gift trust.
Bad Example 1. Your child is very responsible with a good job and a family. He or she is an Arizona resident who owns a home with $300,000 of equity, has $100,000 in a Schwab investment account, owns two rental homes each with $50,000 of equity and $10,000 of stock in an Arizona corporation. You gave your child $100,000 cash ten years ago and your child invested it wisely and the sum has grown to $200,000. Child runs a red light and causes an accident that causes the driver of the other car (a 45 year old doctor who earns $250,000 a year) to become a quadriplegic. The doctor sues your child and gets a judgment for $5,000,000 ($250,000 a year earnings times 20 years of lost earnings). Your child was smart enough to have a $1,000,000 umbrella policy on top of a $300,000 automobile liability policy. The insurance pays $1,000,000. The creditor gets $150,000 of the home equity (Arizona homestead exemption protects the first $150,000 of equity in the primary residence) plus the $100,000 Schwab account, plus the $100,000 of equity in the two rental properties, the $10,000 equity in the stock and the $200,000 current value of your gift. Your child is forced to move out of the home and the creditor garnishes your child’s wages indefinitely to pay the $3,440,000 remainder of the judgment. Bottom line: The creditor gets $560,000 of your child’s assets including all of your gift and its appreciated value.
Good Example 2. Same facts as Bad Example 1 except you gave your child $100,000 in a gift trust. The creditor would get everything listed in Bad Example 1 except the $200,000 appreciated asset held in the gift trust. The trustee could use the assets in the gift trust for your child’s benefit. For example, the trustee could rent a home for the child and his or her family and pay the rent directly to the landlord. The trustee could pay your child’s utility bill. The trustee could rent a car and pay the rent directly to the lessor and your child could drive the car. Any money paid by the trustee directly to the child would go instead to the creditor so the trustee never pays money directly to the child. Instead, the trustee uses the money to benefit the child. Bottom line: The creditor gets $360,000 of your child’s assets, but does not get any of your gift and its appreciated value.
Best Example 3. Same facts as Bad Example 1 except you gave your child $100,000 in a gift trust and your child created an Arizona limited liability company before the accident and transferred the following assets to the LLC: (1) the two rental properties ($100,000 value), (2) $100,000 Schwab account, and (3) the $10,000 of corporate stock. The creditor gets the $150,000 of excess equity in your child’s residence, but none of the other assets owned by the LLC or the assets in the gift trust. Arizona LLC law provides that the creditor’s only remedy with respect to a judgment against the owner of an Arizona LLC is to get a charging order, which is a court order served on the LLC that says if any money or property is ever distributed out of the LLC it must go to the creditor. Because your child controls the LLC he or she never distributes any assets out of the LLC so the creditor never gets any of the LLC’s assets. Bottom line: The creditor gets $150,000 of your child’s assets, but does not get the assets valued at $210,000 owned by the LLC and any of your gift and its appreciated value of $200,000. Total amount of assets protected is $410,000.
Important Note: Best Example 3 illustrates why you should form an Arizona LLC to own investment assets – to prevent your creditor from getting your investment assets. To learn more about Arizona LLCs go to my website called “Arizona Limited Liability Company Law.” We have formed 9,200+ Arizona LLCs and would love to form yours. If you have questions about forming or operating Arizona LLCs or if you want to form a new LLC, call Richard Keyt at 480-664-7478 or Richard C. Keyt at 480-664-7472.
Benefits of a Beneficiary Controlled Asset Protected Trust
The reasons you should create a Beneficiary Controlled Asset Protected Trust instead of making an outright gift of valuable property to your loved ones are:
- To give your loved ones life-time protection against creditors, ex-spouses, predators and the Bankruptcy Court.
- To keep control of the valuable assets out of the hands of a loved one who is terrible with money or who has a drug or alcohol problem.
- You and other loved ones of the trust beneficiary can make additional gifts to the gift trust from time to time to further increase the value of the assets held in trust.
Should Your Parents Create a Beneficiary Controlled Asset Protected Trust for You?
If your parents intend to give you valuable assets, tell them to do it with a Beneficiary Controlled Asset Protected Trust so the gift is asset protected from your creditors, ex-spouses and bankruptcy court.
Hire Us to Prepare a Beneficiary Controlled Asset Protected Trust
We prepare BCAPTs for $3,500 for the first trust and $1,000 for each additional trust. To hire us to prepare a BCAPT complete and submit our BCAPT questionnaire. If you want your BCAPTs to be created when you die then hire us to prepare an estate plan with a revocable living trust. See the contents and price of our estate plan with a revocable living trust.
If you have any questions about BCAPTs, wills, trusts, estate planning or our two estate plans call or email one of us.
- Richard C. Keyt (the son) at 480-664-7472 and [email protected] or make a phone appointment with him using his online calendar.
- Richard Keyt (the father) at 480-664-7478 and [email protected] or make a appointment with him using his online calendar.
How to Book a Free Meeting to Get Answers to Estate Plan Questions
If like most people you have questions about Wills, Trusts and estate planning and want to learn more about how an estate plan can protect your most important asset – your family – then you should:
1. Make a free appointment with Arizona estate planning attorney Richard Keyt using our online scheduling calendar or by calling our estate planning legal assistant Michelle Watkins at 480-664-7413. Our meeting will be a phone, in office or Zoom video meeting approximately one hour in length.
2. Complete our online Gold Estate Plan Questionnaire. The Questionnaire gives us information we need for our meeting. You may have questions about the questions in the Questionnaire. We will answer your questions during our meeting. If you don't have time to complete the Questionnaire that's ok. We can go over the Questionnaire during our meeting.
If you have any questions about Arizona estate planning, the process, fees or anything else, call Richard C. Keyt at 480-664-7472 or his father Richard Keyt at 480-664-7478. There is no charge for inquiries about estate planning or estate planning documents.
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