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Using a Trust when Beneficiary Designations Won’t Work

One convenient way to direct assets at death is through the beneficiary designation.
For example bank accounts and certificates of deposit can be in your name with a pay-on-death (POD) provision naming the persons could receive the balance of the account when you die. Retirement accounts, IRAs and life insurance policies will name a beneficiary. You can even make a revocable transfer-on-death deed for real estate.

BUT OCCASIONALLY THOSE DO NOT WORK WELL!

First, read the “fine print” of a pay-on-death provision. It may not accomplish what you want. We found that the largest bank and largest credit union in our area both have account agreements which say, “If you name more than one person as pay-one-death beneficiaries, then the bank will give the money in equal shares to the people you named who are then surviving.” Our clients who have children and grandchildren usually intend for grandchildren to take the share of a parent (your child) if that child dies before you. But the account agreement’s language will not accomplish that.

In that situation, a simple trust can accomplish everything you want. The trust can be the pay-on-death beneficiary or designated beneficiary; and then promptly pay the people you intend to benefit.

More importantly, a simple beneficiary designation will send wealth directly to a person; and circumstances may change to make that a very bad idea! For example, if by the time you die, the person you want to benefit has creditors who are entitled to take his property; if he is simply not good at managing money; if he is going through a difficult separation or divorce; or has developed addictive behavior; or has become incapacitated. The Supreme Court recently ruled that a debtor in bankruptcy will not receive an inherited IRA, even though he is named as its beneficiary. Instead, it goes into his bankruptcy estate and is paid out to his creditors.

In all of those situations, a trust provides protection. It can be as brief as a quick “look to see if the coast is clear”. If there is no reason to withhold distribution, the entire amount of wealth could be immediately transferred. But if it needs to be protected, then it can stay in the trust and be used to benefit the persons you intend to benefit.
The attorneys at Goodall, Pelt & Carper, PC in Stafford, Virginia are glad to help you. Give us a call at 540-659-3130 to discuss whether a trust should be part of your asset management or estate plan.