Beneficiary-Controlled Trusts Can Lose Asset ProtectionBeneficiary-Controlled Trusts Can Lose Asset Protection

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 w...