The Beneficiary-Deemed-Owned Trust (BDOT) is a relatively recent development among estate planning techniques. It has some characteristics similar to an Intentionally Defective Irrevocable Trust (IDIT), and others that are like a Beneficiary Defective Inheritor’s Trust (BDIT). However, it works in a different way, and is useful in different situations. The beneficiary can sell assets income-tax-free to the trust (like an IDIT), but the initial funding of the trust is not limited to $5,000 (as is true of a BDIT).
(1) To show the participants which specific tax laws are utilized so that the BDOT technique achieves "Grantor Trust" status, so that the beneficiary becomes taxable on the activity of the trust.
(2) To explain when the BDOT technique is useful, which clients will find it appealing, and what situations need to exist before this technique should be presented as an opportunity for clients.