The Beneficiary Designation Trust:
The New Simple Will
What if I told you there was an estate planning tool that offered the best of both worlds? The ease of a Simple Will and the probate avoidance and privacy of a Revocable Living Trust. Well, there is, and it is called a Beneficiary Designation Trust.
The Beneficiary Designation Conundrum:
Have you ever opened a bank account or a retirement account and been asked who you wanted to name as a beneficiary? These are beneficiary designations, and they are like little estate plans. Each account with a beneficiary designation will likely avoid probate and go directly to your named beneficiary without an administration.
Sounds great, right? But there are problems:
- It avoids probate and the hard work you put into your will. Your will has detailed provisions about your beneficiaries, how they should receive their inheritance, and where your inheritance should go if they predecease you. If an account or piece of property has a beneficiary, pay-on-death, or transfer-on-death designation, this will trump whatever is listed in your will.
- Who will pay your bills, and where will they get the money? A will names the person authorized to determine the validity of any creditor claims or liabilities that need to be paid by your estate. However, if all assets use beneficiary designation, no funds will be available to pay the bills or taxes.
- The added burden of keeping multiple “estate plans” consistent. Each beneficiary designation operates like a separate estate plan. To be consistent, each beneficiary designation should be set up exactly the same as the will. Unlike a will, the rules for these estate plans may be spread out over several documents that you barely glanced at. Each beneficiary designation may have a different result if there is a problem with one of the beneficiaries.
- A Guardianship may be necessary if a beneficiary is underage. Naming an underage beneficiary on a beneficiary designation form may require guardianship since the beneficiary is too young to manage an account.
Enter the Beneficiary Designation Trust:
Some attorneys advise their clients to remove all beneficiary designations and allow all assets to pass through probate to address these issues. But there is another solution – the Beneficiary Designation Trust. It is easy to get the following benefits by naming the Beneficiary Designation Trust on the beneficiary designation form:
- Bypass probate. Accounts and property directed to a revocable living trust do not go through probate. The successor trustee will be able to control the assets, take care of the bills, and make distributions to the beneficiaries according to one set of rules without the involvement of the courts.
- Maintain privacy after death. A will is a public document; a trust is not. Anyone, including nosey neighbors, predators, and the unscrupulous, can discover what you owned and who is receiving the items if you have a will. A trust allows you to maintain your loved ones’ privacy after death.
- Protect you from court challenges. Although court challenges to wills and trusts occur, attacking a trust is generally much harder than attacking a will because trust provisions are not made public.
- Easy revisions. Often when people want to change a will, they decide just to start over. A Beneficiary Designation Trust can be changed using an amendment, or it can easily be changed to a standard revocable living trust to add additional features.
- Great for Employment Benefits and Minor Children. Group term life insurance and retirement accounts can name a Beneficiary Designation Trust as the beneficiary instead of minor beneficiaries. This keeps these significant assets out of probate and out of guardianship.
- What about the House? The Beneficiary Designation Trust can hold the primary residence and keep it out of probate.
Differences Between a Beneficiary Designation Trust and a Revocable Living Trust:
A Beneficiary Designation Trust is a simplified version of a revocable living trust that is designed only to include the post-death administration and distribution provisions, just like a will. Because the Beneficiary Designation Trust is designed to be simple, it does not include asset protection provisions or complex estate or income tax provisions. However, it can adapt to your changing needs because it is amendable, like a revocable living trust.