As a Houston, TX high net worth estate planning lawyer, the firm receives questions about many different types of trusts. One powerful tool for managing and passing on your wealth is the Beneficiary Deemed Owner Trust (BDOT). This trust can help Texas residents distribute their assets efficiently and reduce taxes.
What Is A BDOT?
A Beneficiary Deemed Owner Trust is a legal arrangement where a trustee manages assets for a beneficiary, who is treated as the owner for tax purposes. This means the beneficiary reports the trust’s income on their tax return, often resulting in lower taxes than if the trust were taxed on its own.
How Does A BDOT Work?
Usually, trusts are taxed at higher rates than individuals. However, with a BDOT, income and other tax items generated by the trust flow directly to the beneficiary’s tax return. This structure can lead to significant tax savings, especially for beneficiaries in lower tax brackets.
Key Benefits Of BDOTs
1. Tax Savings: One of the main advantages of a BDOT is its ability to reduce tax liabilities. Since the beneficiary, who may be in a lower tax bracket, is considered the owner for tax purposes, the income is taxed at their individual rate rather than the higher trust rate.
2. More Control: Beneficiaries have greater control over trust assets, allowing them to use income for personal expenses or reinvest it as needed within the trust’s guidelines.
3. Better Estate Planning: BDOTs are particularly useful for estate planning. By utilizing the beneficiary’s lower tax rates, more wealth is preserved and effectively transferred to the next generation.
Federal Estate Tax Rules
As of 2024, the federal estate tax exemption is $13.61 million per individual. However, this exemption is set to end in 2026, potentially lowering the threshold for estate taxes. For Texas residents, it is crucial to plan ahead and consider strategies like BDOTs to maximize the current exemption and minimize future tax liabilities.
Important Things To Know For Texas Residents
• Irrevocable Trust: A BDOT is generally irrevocable once established, meaning its terms cannot be easily changed or revoked.
• Choosing A Trustee: Choosing a trustee is a critical decision. The trustee must manage the trust assets prudently and in the beneficiary’s best interests.
• Following Tax Rules: Adhering to IRS regulations governing BDOTs is essential to ensure the trust’s tax benefits are realized without triggering unintended consequences.
How A BDOT Can Help
Let’s consider a Texas family with substantial assets. By establishing a BDOT for their children, the parents can ensure that income generated by the trust is taxed at the children’s lower rates. This not only reduces the family’s overall tax burden but also preserves more wealth for future generations.
For Texas residents, a Beneficiary Deemed Owner Trust offers a strategic advantage in estate planning. By leveraging the lower tax rates applicable to beneficiaries, families can significantly reduce tax liabilities and ensure a more effective transfer of wealth. As the federal estate tax exemption is set to decrease in 2026, now is an opportune time to consider establishing a BDOT to maximize current benefits.
If you have questions about BDOTs or other estate planning strategies, feel free to contact Stuart Green Law, PLLC — we are dedicated to helping families navigate the complexities of wealth management and estate planning.