Published November 2026 · Reviewed by Todd Rosenfield, Esq., Estate Planning Attorney
Key Points
- Leaving an inheritance in trust can protect it from a child’s creditors, divorce, and poor decisions, but income kept in a trust is taxed at the highest federal rate at just $16,000 (2026). An individual doesn’t reach that rate until $640,600.
- A Beneficiary Deemed Owner Trust (BDOT) is designed so the trust’s income is taxed to the beneficiary at his or her own, usually lower, rates, while the assets stay protected in the trust.
- A BDOT can be especially valuable for retirement accounts left to a trust, where the 10-year payout rule can push large distributions into the trust.
- Our BDOT provisions include built-in safeguards, and they can be drafted “dormant” so they’re switched on only if and when they make sense.
The problem: protection vs. taxes
Many parents leave their children’s inheritances in trust rather than outright. A trust can protect the inheritance if a child is sued, divorces, faces bankruptcy, or simply isn’t ready to manage a large sum.
The trade-off has always been taxes. Income a trust keeps is taxed under the trust tax brackets, which are extremely compressed:
| 2026 federal income tax | Top 37% rate begins at |
|---|---|
| Trust | $16,000 |
| Single individual | $640,600 |
| Married couple filing jointly | $768,700 |
On top of that, the 3.8% net investment income tax applies to a trust’s retained investment income above that same low threshold.
So families have faced a hard choice: distribute the income to the child (and lose the protection on those funds), or keep it in the trust (and pay the highest rates).
How a BDOT works
A BDOT gives the beneficiary the right to withdraw the trust’s taxable income each year. Under Internal Revenue Code §678, a person who has that right is treated as the owner of that income for income tax purposes. As a result:
- The trust’s income is reported on the beneficiary’s own tax return and taxed at his or her rates, often far lower than the trust’s.
- The assets themselves stay in the trust, managed by the trustee and protected by the trust’s spendthrift provisions.
- The trustee continues to decide when to distribute principal, under the standards you set.
In short, a BDOT aims to get the tax treatment of an outright inheritance with much of the protection of a trust.
A simple example
Suppose a trust for your daughter earns $50,000 a year of interest and retirement account distributions.
- Kept in a traditional trust, that income could generate more than $17,000 in federal income tax, most of it at the 37% rate plus the 3.8% surtax.
- As a BDOT, if your daughter and her spouse earn $150,000, the same $50,000 would generally be taxed in their 22% bracket, roughly $11,000, about $6,000 less every year, while the funds remain protected.
Simplified illustration. Actual results depend on the type of income, deductions, and the beneficiary’s tax situation.
Why BDOTs matter for retirement accounts
Under the SECURE Act, most children who inherit an IRA or 401(k) must empty it within 10 years. When the account is left to a protective trust that holds those distributions, they can be taxed at the trust’s compressed rates. A BDOT can shift that income to the beneficiary’s own return, often a significant savings, while the retirement funds stay in the trust. (See our article on the SECURE 2.0 Act and retirement account beneficiaries.)
Built-in safeguards
A withdrawal right is a real right, so a BDOT has to be drafted carefully. Our trusts include safeguards designed to protect the beneficiary and the trust, such as:
- Automatic suspension of the withdrawal right in certain situations, such as when a beneficiary faces creditor problems
- Oversight by an Independent Trustee or Trust Protector, who can make adjustments as circumstances change
- Careful handling of unused withdrawal rights. Massachusetts law doesn’t provide a statutory safe harbor here, so the trust must address it directly.
The dormant option: a BDOT can be drafted so the withdrawal right is switched off when the trust is funded and can be activated later by the Independent Trustee or Trust Protector, for example when a child finishes school or the tax savings become meaningful. That flexibility lets the trust adapt to each child’s circumstances years from now.
When a BDOT may not fit
- A beneficiary who is already in the top tax bracket may see little tax benefit.
- Special needs trusts should not use a BDOT, since it could affect government benefits.
- “Pot” trusts with several beneficiaries sharing one trust generally aren’t suited to it.
- Families should be comfortable with the beneficiary holding a withdrawal right, even with safeguards in place.
A BDOT can also be paired with other planning. For married couples in Massachusetts, it often works alongside a Joint Exempt Step-Up Trust (JEST).
Frequently Asked Questions
Beneficiary Deemed Owner Trust. It’s a trust designed so the beneficiary, rather than the trust, is treated as the owner of the trust’s taxable income for income tax purposes.
Only the trust’s taxable income can be withdrawn, and only under the trust’s terms and safeguards. The principal stays in the trust, under the trustee’s control.
Yes, and that’s one of its most valuable uses. It can shift the tax on inherited retirement account distributions to the beneficiary while the funds remain protected in the trust.
If your trust is revocable, yes, by amendment. For irrevocable trusts, it may be possible depending on the trust’s terms. We can review your trust and explain the options.
Talk With a Massachusetts Estate Planning Attorney
At Socius Law Firm, Attorney Todd Rosenfield can review your goals and explain whether BDOT provisions make sense for your children’s inheritance. Schedule a free consultation or call (508) 870-5759.
Sources: Internal Revenue Code §§1(e), 678, 1411; IRS Rev. Proc. 2025-32; SECURE Act and SECURE 2.0 Act; M.G.L. c. 203E, §505. This article is general information, not legal advice.
