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What are the pros and cons of naming a living trust as a beneficiary on financial accounts vs holding the account in trust name?

Monterey Park, CA |

Trust accounts create a wall between trust and regular bank accounts. This causes a segregation of monies similar to before tax and after tax. Thus a check issued by one's own trust account cannot be deposited into one's own checking account. A work around is to name the trust a beneficiary or contingent beneficiary on one's bank or brokerage account or life insurance policy. Thus, the account ownership and funds held in the account would pass from husband to wife in case husband dies. After the wife dies, the monies go into the trust, obviating probate. The question is: What are the pitfalls in going down this path?

Are there other avenues to get over this hurdle?

Attorney Answers 4

  1. A check issued from your trust account to you can be deposited into your personal account.
    Both accounts should be in the trust in my opinion.
    The big advantage of the trust is that the money in the trust can be used if you become unable to manage the trust yourself by your successor trustee and everything in the trust willavoid probate.

    The answer given does not imply that an attorney-client relationship has been established and your best course of action is to have legal representation in this matter.

  2. Your question contains many inaccurate statements. I would, therefore, suggest you retain an attorney to help you sort through the facts unique to your financial situation to advise you of the best way to hold your financial accounts.

    Joint tenancy is the preferred way for a husband and wife to hold title to financial accounts (unless they are held in the name of a revocable living trust). The account then passes to the survivor by operation of law, without probate. Same result for accounts which designate a beneficiary – the account passes to the designated beneficiary without probate.

    Accounts held in trust pass to the successor trustee upon the trustor’s death provided the trustor is the named trustee and probate, too, is avoided. However, those funds are part of the trust estate and may be subject to federal estate taxes and state inheritance taxes.

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  3. In addition to the excellent comments from both attorneys who have previously responded to your question/statement, I would recommend that you first determine what is it that you ate truly trying to accomplish- probate avoidance, estate tax reduction, asset protection, etc.. Next, meet with an estate planning attorney.

    Best Regards

    Mason & Associates
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  4. To elaborate on Mr. Daymude's response, I would say that all assets belonging to the person at the time of death are included in the mix for purposes of determining if any estate tax is due, not just trust estate assets. Also, joint tenancy has its downside, since if both spouses die together, then the assets in that account will have to go through probate. I would never advise joint tenancy as a way to pass on property for a family that has minor children since the death of both spouses would trigger a guardianship of the estate, bringing the distribution of assets to the child into the court system and giving the child the entire inheritance at age 18.

    I generally advise my clients to make their living trust the beneficiary of brokerage, savings, and checking accounts. That's because the trust should be dealing with all the possible contingencies if the initial beneficiaries die, or become disabled, etc. You can continue to make checks out in your own name in a checking account, even if that account is titled in the name of a revocable trust. I also designate the trust as beneficiary of insurance policies that don't have a large cash value. Thus term life insurance policies have the revocable trust as beneficiary but continue to be held in the name of the owner. I don't generally title retirement accounts in the name of the trust, nor make the revocable trust the beneficiary of such accounts. A trust would have to have very specific conduit provisions for that to work and most of my colleagues shy away from those. Therefore, retirement accounts (IRAs, 401ks) go by beneficary designation to the people who are your beneficiaries. The custodian of retirement accounts usually allow you to name alternate beneficiaries as well on those accounts. I agree with Mr. Pippen that a check issued from your trust account to you can be deposited to your personal account and that one of the advantages of a revocable trust is that someone can step in to manage your financial affairs in case of incapacity.

    There is no income tax on insurance policy proceeds for the beneficiaries. Though I haven't answered all your questions, I hope this helps to clarify some of your concerns.

    This material is for general information purposes only and offers incomplete treatment of the topics covered. The writer assumes no legal responsibility for any use or misuse of the information. Consult your attorney for your individual legal needs as the law changes frequently and only an attorney who is abreast of these changes can give you the up-to-date and specialized help that you require and deserve.

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