Trust & Estate

How to Use BDIT Trusts To Reduce Taxes on Carried Interest

How to Use BDIT Trusts To Reduce Taxes on Carried Interest
March 9, 2023

If you're a high net worth individual or professional looking for ways to reduce taxes on your carried interest, one potentially beneficial financial product to look into is the Beneficiary Defective Inheritor’s Trust (BDIT). This financial product takes advantage of tax laws and exemptions to minimize taxes on the trust's total assets and income.

Here's how it works:

Set up the trust

Someone (other than you) can set up a BDIT in a no-tax state like Nevada and fund it with a nominal amount. The trust will be the owner of the assets, while you will be the beneficiary.

Transfer the assets

Next, you would sell your carried interest to the trust at its current fair market valuation (usually around when the fund is formed or before portfolio assets have been marked up significantly). It is common for a BDIT trust to purchase assets with a structured loan from the original owner (the trust will typically pay 10% down).

Eliminate state taxes

When income is realized inside the trust, it only pays federal taxes!

Distribute Trust Assets

As the named beneficiary of the BDIT, you receive distributions when needed.

The Bottom Line

While there are benefits to using BDIT trusts, such as preserving more carry for future generations and providing for beneficiaries in a tax-efficient manner, it's important to seek professional advice before setting one up. Once an asset is transferred into a BDIT trust, its terms cannot be altered without permission from the court.

Savvy is here to help with any questions you may have about BDIT trusts or other financial planning strategies.

The benefits of using BDIT trusts include the ability to preserve more carry for future generations, to provide for the trust beneficiaries in a tax-efficient manner, and to take advantage of favorable tax treatment for certain types of income and gains. However, once an asset istransferred into a BDIT trust, the trust document dictates how the funds will be distributed, and the grantor cannot alter those terms withoutpermission from the court. Thus it is important for grantors to seek professional advice before setting one up. This registration with the SEC does not constitute a professional specialty designation or endorsement. Savvy only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Savvy does not provide tax or legal advice. Investors should work with their own professional (attorney, tax, insurance)regarding consequences, if any, as it relates to their circumstance and the applicability of any particular tax strategy.