Dec 1, 2006 12:00 PM, By Charles Harris, partner, and Tye J. Klooster, associate, Katten Muchin Rosenman LLP, Chicago

By: By Charles Harris, partner, and Tye J. Klooster, associate, Katten Muchin Rosenman LLP, Chicago

Advisors promote trusts as an indispensable component of the estate plan. We tout the importance of trusts for credit shelter and generation-skipping transfer (GST) tax planning. We proclaim that trusts protect assets from creditors, including insatiable divorce creditors. Meanwhile, many of our clients are worried that inheritances will get tied up in trust, complicating beneficiaries' lives. In the past, there was a solution: the beneficiary-controlled trust that gave beneficiaries a fair amount of control, yet still provided crucial tax and creditor protection.

The beneficiary-controlled trust proliferated dramatically in recent years — and no wonder. In it, the current beneficiary is named as the sole trustee; has the power, in his sole discretion, to make distributions of income and/or principal to himself under the health, education, support and maintenance (HESM) standard of Internal Revenue Code Section 2041 and Treasury Regulations rules,¹ and has a limited power to appoint trust assets to anyone other than the beneficiary.²

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