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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?

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Attorney answers 4

Posted

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.

Asker

Posted

I already checked with my bank. The local banker said unequivocally that any check issued by the trust account cannot be deposited into the personal account since the names would not match. Money from a trust account must go into a similar account and the names must match. This IS A REAL PROBLEM. I am not making it up.

Joseph Franklin Pippen Jr.

Joseph Franklin Pippen Jr.

Posted

Doesn't make since. With that argument-you could not deposit a check from anyone.

Asker

Posted

If both accounts are placed in the name of the trust, how can I transfer funds from such "walled-in" accounts to a plain Jane checking account for my sundry needs? do you see the problem?

Joseph Franklin Pippen Jr.

Joseph Franklin Pippen Jr.

Posted

You said that you wanted to deposit a trust check made payable to you into a personal account.

Asker

Posted

That's right - it don't make sense in not so good English. In talking to my local branch, I was advised to create a trust account which would act as a conduit for funds to be deposited into from any external trust account and then to make a transfer from the locally held trust account to the personal account at the branch. An unnecessary transaction and another account creation just to pass the funds through.

Posted

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.

I am licensed in California only and my answers on Avvo assume California law. Answers provided by me are for general information only. They are not legal advice. Answers must not be relied upon. Legal advice must be based on the interplay between specific exact facts and the law. This forum does not allow for the discussion of that interplay. My answer to any specific question would likely be different if that interplay were explored during an attorney-client relationship. I provide legal advice during the course of an attorney-client relationship only. The exchange of information through this forum does not establish such a relationship. That relationship is established only by personal and direct consultation with me followed by the execution of a written attorney-client agreement signed by each of us. The communications on this website are not privileged or confidential and I assume no duty to anyone by my participation on Avvo or because I have answered or commented on a question. All legal proceedings involve deadlines and time limiting statutes. So that legal rights are not lost for failure to timely take appropriate action and because I do not provide legal advice in answer to any question, if you are an interested party you should promptly and personally consult with an attorney for legal advice. Also, see Avvo's terms and conditions of use, specifically item 9, incorporated by this reference

Asker

Posted

Thank you for your response to my AVVO question. You said that there were a number of inaccurate statements, without telling me what those inaccuracies were. Would you care to elucidate?

Asker

Posted

In the case of a joint account with right of survivorship, the transfer to beneficiaries will occur directly. The inheritance tax consequence would be loss of one exemption (otherwise possible thru an AB trust). What are the likely income tax consequences?

Asker

Posted

I have heard estate attorneys recommending that the trust be named as a beneficiary on life insurance policies. Why would the same idea not carry over to bank accounts and brokerage accounts? I am yet to understand the differences in outcome between funding the trust directly vs naming the trust a beneficiary, Is the latter a "good" or "bad" idea? if yes, in what respect?

Aida Milagros Del Valle

Aida Milagros Del Valle

Posted

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 answer er 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

Posted

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
8200 Wilshire Blvd. Suite 200
Beverly Hills, CA 90211
877-288-6230 O
323-944-0413 F

Asker

Posted

Why bother posting a reply if all you are going to say is retain a lawyer for every minor question? Lawyers do not come cheap. Also, they do not have the attention span to focus on your problem unless they are looking at earning substantial fees. Yes, I agree that your solution is good for Bill Gates.

Asker

Posted

The answer to your last question is "all of above"' i.e., do you know of anyone that does not want probate avoidance, estate tax reduction, asset protection, and I would reducing income tax consequences a well. I appreciate the fact that the greater the desire for all such broad descriptors, the greater the complexity and hence greater the urgency to seek that "mythical lawyer" who is going to provide all the goods on a platter. What I am trying to do is first probate avoidance and minimizing Federal inheritance tax by availing of two exemptions a revocable living trust with an AB trust and gain a stepped up basis for appreciation in asset valuation and structure bank accounts in conjunction with the RLT to pass the estate to beneficiaries with minimal income tax consequences as well. Clearly IRA accounts have to pass external to the RLT to avoid triggering income tax from immediate distribution, using current options available to beneficiaries. I'd welcome any sage words in this regard.

Asker

Posted

Have some typos in comment above. Don't have the means to edit. I apologize. Here are the corrections... "...I would ADD reducing income tax consequences AS well"... "...two exemptions WITH a revocable living trust"...

Posted

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.

Asker

Posted

Thank you for your observations. I read carefully and understood each point made, except the one concerning joint accounts. From Mr.Daymude's observation, I concluded that if H & W were to die then the cash in the account would be payable to the beneficiaries. If there were no minor children involved, would my preceding statement be correct? Also, if the account is inherited by the beneficiaries directly as opposed to a distribution of the same from a living trust, the Federal estate tax is impacted since only one individual exemption as opposed to two exemptions could result in a higher estate tax liability, depending on the prevailing exemption and the total value of the estate. Correct? What I am unclear about is whether the beneficiaries owe income tax. I'd appreciate your observations there. Thank you!

Asker

Posted

Sorry, I neglected to mention that the cash in the account would be payable to the named beneficiaries without probate if there were no minor children involved. Also, not clear is the process by which the probate court would get involved, in the case of minor children, if such were the circumstance. I'd appreciate any clarification here.

Aida Milagros Del Valle

Aida Milagros Del Valle

Posted

In the case of the simultaneous death of the H and W, the accounts would only go to the "beneficiaries" without a probate proceeding if alternate ( "contingent") beneficiaries are designated on the accounts. Income tax liability has to do with the "basis" of the property. Under present law, assets get a step-up in basis to fair market value on the date of death. Therefore, capital gains tax of highly appreciated assets would only be incurred on the gain from the date of death of the donor to the date the assets were sold. This is huge benefit over gifting of highly appreciated assets during life, since the donee gets the same basis as the donor. The basis of the donor is what they bought the asset for. With real estate you add on capital improvements etc. to the donor's basis. Hope this helps. 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. less