This is a common question from those who set up living trusts.
First off, if you are contemplating NOT doing a trust because you plan on just owning an account in your personal name, and you figure by naming other individuals as your beneficiaries, you are fine, then please read why you should not rely on beneficiary designations to avoid an estate plan.
Now, if you have already created a trust, and you are wondering whether your trust should be listed as the OWNER of an account versus be listed as a BENEFICIARY on the account — keep reading!
In general, it is usually preferred to have the trust own your account, rather than be named merely as the beneficiary on an account.
Naming your Trust as a Beneficiary
One of the major downsides of naming a BENEFICIARY is that the beneficiary you name can only access your account if you die. This means that if you are the owner of the account, and you are temporarily or permanently incapacitated (e.g., coma, Alzheimer’s, surgery, intubation), your beneficiary CANNOT access your account because you are still alive. Neither can you personally access the account because you are incapacitated. So, the account in many ways is inaccessible.
In this case, what needs to happen is that because the account owner was you (in your personal name), someone would need to present a power of attorney on your behalf. A power of attorney generally is where you would have named who can make financial decisions for you if you are incapacitated. This sounds great, right?
Problems with Powers of Attorney
There are some problems with powers of attorney. Here are a few:
- Banks and financial institutions don’t like them and can reject them. There is a a lot of fraud that goes on here. People abuse powers of attorney and sometimes use them inappropriately, especially to commit elder fraud. Banks and financial institutions understand this phenomenon and are reluctant to accept these powers of attorney (for their own liability concerns). Some financial institutions will prefer that you fill out a specialized power of attorney using that institution’s own specific form.
- Powers of attorneys can cause delays. Even when a power of attorney isn’t rejected immediately, the institution will do some level of due diligence on its part before blindly accepting the power of attorney. This usually means sending the power of attorney to their legal counsel. In an emergency, these types of delays can cause mini to major disasters. Furthermore, if your power of attorney is a “spring power of attorney,” it means the institution will also need proof from treating doctors that prove you are truly incapacitated from a financial perspective. Getting these letters can often be a painful process as well, and can cause even further delays than compared to a “durable” power of attorney.
- Powers of attorney can go stale. While there is no legal “expiration date” on a power of attorney per se, some do come with built-in expiration dates. Even if a power of attorney does not expire, a bank or financial institution may be very reluctant to accept a power of attorney that was created five or ten years ago. How does the institution know this is still a valid wish? How do they know that you didn’t reject this power of attorney and created a new one three years later, naming someone else instead?
- Powers of attorney die with the individual. Once you pass away, your power of attorney automatically expires. Many people mistakenly think a power of attorney will allow people to “wrap up my affairs after I’m gone.” Entirely false! A power of attorney only works as long as and until you are alive.
For these reasons, naming the trust as a beneficiary only works when you pass away. Having a power of attorney is still a good idea, but not my go-to planning option. I only rely on it when I have no other choice. I’ll come back to this.
Naming your Trust as the Owner
What happens if you instead name your trust as the OWNER rather than a beneficiary?
First of all, if you name your trust as the OWNER on the account, you don’t need a beneficiary. In fact, you probably won’t even be allowed to name a beneficiary because that could lead to conflicting outcomes. Imagine your trust (the owner) states that everything goes to your brother, Michael. Imagine though that your beneficiary is your sister, Karen. Who should the bank release the account to? This is why when you name the trust as an owner, you don’t need beneficiaries, because the trust document itself specifies who gets what.
Second, why is it better if the trust is the OWNER on the account?
Put simply, it’s because you are covered in both scenarios. If you pass away, the account goes to the beneficiary listed in your trust. If you become incapacitated, your successor trustee will take over and be able to immediately step into your shoes and manage the account for you! You are still the beneficiary while you are alive, so your successor trustee will be able to take care of your financial needs. If you pass away, then the successor trustee will distribute to the trust beneficiaries.
Unlike powers of attorney, trust documents are accepted by financial institutions with very little questions. They work right away. They do not go stale. And they work whether you are alive or after you’ve passed away.
What are the common exceptions?
When would you likely not name your trust as an owner?
There are several examples actually, which is why it’s very important to speak to your attorney about your specific case. But here are some of the more common reasons.
- Your cars/vehicles: In California, it’s easy — you can keep yourself on title as the owner. If you change the owner to trust, it would involve changing your records with the State, the DMV, updating your insurance, and your car registration. Not fun!
- Your retirement accounts: These must be held in your name (as the owner) for tax reasons. Whether you name your trust as a beneficiary or not is a highly complex topic that only your attorney should advise you on. It depends on the recent passing of the SECURE Act, so stay-up-to date!
- Your life insurance: Unless there’s a need to create an ILIT, you can keep yourself as the owner of a life insurance policy, but you can also name your trust as a beneficiary.
- Employer stock-plans: Usually an employer will not permit you to change your brokerage account to name your trust as the owner, if the brokerage account is funded with employer-provided stock incentives. Instead, you have two choices usually. First, either name the trust as the beneficiary on the brokerage account (keeping in mind the risks stated above). Second, create a retail brokerage account, owned in the name of the trust, and transfer your vested shares into the new trust account. Sometimes, your employer has worked an arrangement out with the financial institution so this can happen automatically. Otherwise, you will have to manually do this, which can be trying. Furthermore, note that with some institutions, a retail account does not always provide an end-of-the-year basis report (showing which shares you sold and the basis), whereas the native brokerage account usually does provide such data. When it comes to filing taxes, this can be an important report to provide your accountant. So it’s important to research these questions ahead of time prior to deciding how to deal with this. In any case, don’t forget to do one of these options, because leaving the account in your name, with no beneficiary, means there is a probate after you pass away!
- Joint accounts with children: If you have a small checking account with one of your children, the bank may not permit you to title the bank account in the name of the trust AND add the child as a co-owner at the same time. This makes sense, because it can lead to contrary outcomes when you pass away (e.g., does the bank give the account to the child, or to the persons named in your trust?). If the account is small, I will usually advise clients to just name the trust as a beneficiary and keep the owners as is. But if the account is larger, I will not recommend keeping it outside the trust.
Talk to your Lawyer
Each case is unique and different. I have broken my own rules for some clients, whose situations warranted a different solution. It’s part of being flexible, but also making sure your trust is grounded in sound policies. There is never a one-size fits all. That’s the only thing we can say with absolute certainty!