I'll give you a choice.

I'll give or leave you $1,000,000 (remember, this is all hypothetical for illustration purposes only!).

You can have it in your own pocket. At your death, it will be subject to estate tax. If you have marital problems, your spouse may have a claim on it. If you run into financial troubles, your creditors can go after it. If your kid has an accident while driving your car, the injured parties can go after that money.

Alternatively, I'll put it in trust. It's not yours. It can pass tax-free at your death. Your creditors can't get at it. If you have financial losses, it's there to give you a fresh start.

Which would you prefer? And which would you prefer to provide for your beneficiaries?

Well, you may respond, granted that a trust doesn't have some of the disadvantages (which you hadn't realized existed) of owning the money directly, are the *benefits* comparable? It doesn't do any good to keep the money away from IRS or creditors if it can't be affirmatively used for the beneficiary.

Aside from a QTIP deducted by one spouse and included in the survivor's estate, a trust created by A will only be included in C's federal estate if C is given a general power of appointment. No other restrictions on C's power are required for federal tax purposes. A may want to put on other restrictions for non-tax purposes (see Introduction to Trusts), but they are not required to avoid taxation.

A beneficiary can have:

all the income for life (for various reasons discretion is better);

principal as the trustee determines necessary for their health, education, maintenance and support;

be, or have the right to name, the trustee who determines what is necessary for their health, education, maintenance and support;

principal as the trustee determines necessary for their "best interests";

have the right to name [including broad power to change, but not be themselves] the trustee who determines what is necessary for their or their dependents best interests;

have a "quasi-general" power of appointment -- a right in life or at death to appoint to anyone other than themselves, their estate, their creditors, or the creditors of their estate;

all of this without inclusion in their estate.

On the other hand, a trust could be created in which B, the trustee, has complete discretion whether to pay any income or principal to the beneficiary, with the beneficiary having no say at all.

And these differences can be varied over time and circumstances.

Now let's look at the real-life practical consequences of giving a beneficiary a "quasi-general" power of appointment and making them trustee.

The trust will not be included in C's estate when he dies. It will not be subject to the claims of his spouse upon divorce, and it will not be subject to claims of his creditors.

Does he want a house? The trust can buy a house for him to live in, still without putting it into his name.

In many cases, a beneficiary can benefit without ever taking a dime from his trust. Think how much saving is done as protection from a "rainy day". But how much more can you afford to spend, how much can your living standard be increased, if you know there's an umbrella in the closet?

Suppose C insists on getting money out of the trust, other than regular distributions. She can appoint part or all of the trust to another trust for Y (if it were outright, then Y would later make a taxable gift), whom she trusts to then appoint to her. And if she's hesitant about Y, she can appoint 10% to Y, and only appoint the next 10% after Y has acted.

Remember that C can have a power to appoint to himself if it's for his health, education, maintenance and support. Theoretically if he exceeds those standards D can sue to stop him. Now suppose D comes to C and says "Dad, grandpa A [or Mom, Dad] said that you could use the trust for your health, education, maintenance and support. I really don't think that includes monthly trips to Acapulco."

To which C replies "you may be right, son. You might be able to sue to stop me from that spending. Just remember that I decide who gets what's left at my death. Now [assuming three children] -- do you want 1/3 of the pie that's left after my trips, or none of a large pie without trips?"

From this concept, you can play continuing variations. If, for non-tax reasons, you want more restrictions on the beneficiary, you can give those powers to outside trustees who can provide similar benefits without giving control to the beneficiaries. And the shadings are innumerable.

The real limitations are not legal but human. You cannot give a beneficiary virtually unlimited control -- and try to restrict them. Are you afraid they'll give some to their spouse rather than their descendants (your descendants)? Then you have to tie them up, restrict their powers of appointment, and face potential resentment from them. If you want to go through that, there are ways to find intervening points.

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