The goal of estate planning is to guarantee that your assets are allocated precisely as you have specified. However, achieving this goal can be complex. We frequently get asked, “Do you need a trust if you have beneficiaries?” Although designating beneficiaries for your accounts is a good place to start, it’s not always sufficient
Your assets might not end up in the hands of the people listed on your accounts if you don’t have a trust in place. Having a trust also has other advantages that you cannot obtain by just designating the beneficiaries of your accounts.
Let’s examine what it means to designate beneficiaries in your accounts and the reasons setting up a trust to manage your assets is a smart idea.
While naming beneficiaries for your accounts is a crucial step in estate planning, it doesn’t always guarantee that your assets will reach the intended individuals. This is where understanding the interplay between trusts and beneficiary designations becomes essential.
Beneficiary Designation vs. Trust: Understanding the Differences
Beneficiary Designation:
- Designating beneficiaries for your accounts ensures that they avoid probate, a legal process that can be time-consuming and expensive.
- However, beneficiary designations override any estate planning you may have in place. For instance, if you name your ex-spouse as the beneficiary of your bank account but state in your trust that you wish your new spouse to inherit the funds, only the ex-spouse will receive the inheritance.
- Additionally, simply naming a beneficiary limits your options for distributing those account funds.
Trust:
- A trust offers greater control over asset distribution. You can either name the trust as the beneficiary of your accounts or retitle the account so that the trust is a joint account owner. The trustee can then handle the distribution of your estate according to the guidelines set forth in the trust.
- This approach allows your loved ones to avoid probate court while granting you full control over the account until your passing.
Why You Might Need a Trust Even with Beneficiaries
While naming a beneficiary can be a temporary solution to avoid probate, it may not offer the comprehensive control you desire over the distribution of your assets. Here are some reasons why you might need a trust even with beneficiaries:
- Controlling Distribution: Simply handing all the money to one person can leave them responsible for unexpected taxes and fees. A trust allows for more specific instructions on how and when the funds should be distributed.
- Protecting Special Needs Beneficiaries: Leaving an inheritance directly to a beneficiary with special needs might disqualify them from government assistance. A special needs trust can help ensure they receive the inheritance without jeopardizing their benefits.
- Avoiding Disputes: Trusts can help prevent disputes among beneficiaries by clearly outlining how the assets should be divided.
While naming beneficiaries for your accounts is a good starting point, creating a trust offers a more comprehensive and flexible approach to estate planning. Trusts allow you to maintain control over your assets, ensure your wishes are followed, and protect your beneficiaries from potential financial challenges.
If you have any questions or need assistance with estate planning, consult with an experienced estate planning attorney who can guide you through the process and create a plan that meets your specific needs.
Trust vs. Beneficiary: Do you need a trust if you have named beneficiaries on your accounts?
Yes. It is always a good idea to have a trust to handle your assets after your death. Although naming the beneficiaries of your accounts ensures that they can avoid probate, it overrides any estate planning you may have in place already. For instance, if you name your ex-spouse directly on your bank account but state in your trust that you wish your new spouse to get the proceeds, only the ex-spouse will receive the inheritance.
Furthermore, merely designating a beneficiary on your account restricts the ways in which you can use the funds in your account. On the other hand, you can retitle the account so that the trust is a joint account owner or designate the trust as the beneficiary of your accounts if you have a revocable living trust. The trustee will then be able to distribute your estate in accordance with the terms specified in the trust.
This method gives you complete control over the account until your death and spares your loved one from going through probate court.
Why shouldn’t I just name a beneficiary for my accounts?
Although designating a beneficiary can be a useful short-term fix to avoid probate, it might not provide you with the complete control you want over how your assets are distributed. If all the money is given to one person, they may be held accountable for unanticipated taxes and fees that they would not have to pay otherwise.
In a few unique circumstances, you really shouldn’t want your accounts to have a single designated beneficiary. For instance, if your child is designated as your account’s pay-on-death beneficiary, they will get all of the money in there when they turn 18 years old. Is it really appropriate for them to have control over so much money at such a young age, especially if the inheritance amounts to hundreds of thousands or even millions of dollars?
You also need to consider how leaving an inheritance by just naming a beneficiary on an account can affect your loved ones who have special needs. Leaving an inheritance outright might disqualify them from government assistance once they inherit the entirety of your account. To prevent this, you’ll want to create a “special needs” trust and have the account funds pay into that trust when you pass on. This can help ensure that the assets from your estate are passed on, while your beneficiary maintains their ability to receive government aid.
Can a Trust Override a Beneficiary Will Trust Bank Accounts- What you need to know
FAQ
Does a trust supersede a beneficiary?
What overrides a beneficiary on a bank account?
What can override a beneficiary?
Should a trust be the beneficiary of a bank account?
Can a beneficiary overrides a will?
Generally speaking, if you designate a beneficiary on a bank account, that overrides a Will. This is in large part due to the fact that beneficiary designations have the ability to (and benefit of) completely avoiding the probate process.
Can a revocable living trust be a beneficiary?
Additionally, simply naming a beneficiary on your account limits your options for distributing those account funds. However, with a revocable living trust, you can either name the trust as the beneficiary of your accounts, or retitle the account so that the trust is a joint account owner.
Can I name a beneficiary for my bank account?
It is possible to name a beneficiary for your bank accounts, including checking and savings accounts as well as certificate of deposits and money market accounts. The beneficiary can be an individual or a revocable trust, meaning a trust that you as the grantor can change or revoke.
How do I name a beneficiary to a checking or savings account?
To name a beneficiary to a checking or savings account, you have to convert the account into what amounts to an informal trust. A trust is a legal construction that is used to, among other things, shelter assets from probate after death. At many banks, your converted bank account will now be referred to as a Payment on Death (POD) account.