E201 Should I Name a Trust as Beneficiary of My Accounts

E201 Should I Name a Trust as Beneficiary of My Accounts?


Another question that we receive often is “should I name a trust as beneficiary of my estate?” In a recent case, Rhonda reached out to us, because she wanted the benefits of a trust (avoid probate, reduce chance of a “will contest,” etc.), but she was not quite ready for the headache of a full-blown trust setup. In her particular situation, naming her trust as beneficiary makes sense. If you are considering this doing this, here are a few things you should consider.

How to Name Trust as Beneficiary

How to Name Trust as Beneficiary

A full-blown trust has to be set up and funded. It can be a nominal amount, even as little as $10. It has to own things and you will need to convert your banking accounts, houses, and related items from your individual name to the trust name. It may be quite a bit of work in some situations. For example. if you live in a co-op, this can be a lot of work to change your deed. You will likely need board approval, and this will take time and work. If changing your banking, you will need to go to the bank and open new accounts in the trust name. You’ll then need to change any direct deposits and withdraws once the new account is open.

In Rhonda’s case, instead of changing all of her accounts now, she is leaving them in her name and changing the beneficiary of the accounts to a trust. For example, when you have life insurance, you can name a person or multiple people as beneficiaries. However, instead of naming a person, you can name your trust to be the recipient.

In her situation, her trust will be unfunded until she passes. Upon her passing, the trust will be funded using the beneficiary designations.

To name a trust as a beneficiary, there are three basic steps. You must create the trust document, you then fund the trust (even a nominal $10), and finally, you name a beneficiary. Usually, you can obtain change of beneficiary forms for your accounts to change the names. The result: you have a hollow, but ready, trust on standby, which is ready to accept funds as beneficiary upon your passing.

Pros of Your Trust as Beneficiary

Pros of Your Trust as Beneficiary

One of the pros for taking this route is that, in theory, you get to avoid the costs and headache of probate. Probate is generally not easy and takes a long time. If there is a beneficiary on an account, then the account does not need to go through probate to be liquidated. You simply need a death certificate and a copy of the trust to withdraw the funds. Having a trust also reduces the chance of a will contest. If there is a wayward heir, they can contest the will if it is probated. If you do not probate, it’s much harder. You essentially create a challenge barrier with a trust.

There is also a phycological connection. Changing all of your accounts out of your name and into a trust name may feel as if it’s not yours. If that is an issue for you, then this option may be a good way around that feeling.

Cons of Your Trust as Beneficiary

This way of doing a trust does not protect you from court-appointed strangers (known as guardians) controlling your funds during your life. If everything is still in your name and you become incapacitated or someone can assert that you are in cognitive decline, then a guardian can be appointed to control your funds. However, if everything is owned by the trust, then a court-appointed guardian can not access those items. Only the trustee of the trust, as chosen by you, can control what happens. Not only does a full trust prevent a court-appointed stranger from controlling your assets, but they most likely won’t bother with you, because there are no funds for them to control.

Cons of Your Trust as Beneficiary

In general, Anthony is not really a fan of naming a trust as a beneficiary, because in his experience, people generally do not do a good job tracking their beneficiary designations. We see very often where people forget to change their beneficiaries after relationship ends and people die. It is very easy to forget, even if you are really well organized. The designations are not conspicuous and are not usually listed on the statements, so people do forget. Bottom line – people do not remember.

Another reason that Anthony doesn’t suggest this route is that honestly, doing it this way does not really save as much time as you would think. It is actually very similar to what you will need to do with your assets when you create a full-blown trust. In either scenario, you will have to submit forms and provide documentation, which is almost the same process in both situations.

Naming a trust as your beneficiary is a good steppingstone as first step to a fully funded trust. We suggest you talk out your wishes and situation with an experienced estate planner to determine the best route for you.

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