Putting beneficiary designations on assets can be a convenient way to avoid probate at death. There are two types of beneficiary designations: Payable-on-death (POD) designations and Transfer-on-death (TOD) designations. POD designations are typically for checking and savings accounts, money market accounts, bonds and CDs, and TOD designations are typically for real property, investment accounts, and vehicles. The beneficiary designated to receive the assets does not have any claim to the assets until the owner dies. Upon death, the beneficiary becomes the owner of the assets, thereby bypassing the need for a probate estate. While beneficiary designations can be straightforward ways to avoid probate court, below are some reasons why having a living trust in place to hold assets can be a better option.
If you want creditor protection for your beneficiaries from lawsuits or divorce, then a trust is the best estate planning tool. If you use beneficiary designations, then upon death the assets are owned by the beneficiary outright, and if that beneficiary has creditors of any sort, then those assets can be subject to the judgments. Likewise, if your beneficiary goes through a divorce, the spouse of that beneficiary could end up with part of the assets. With a trust you can keep the assets held in trust and safe from a beneficiary’s creditors or divorce.
Another reason a living trust can be a better estate planning option is ease of updating beneficiaries. If you are using beneficiary designations for multiple assets and a beneficiary dies, or if you want to add or change beneficiaries, you must update each beneficiary designation on each asset, which can be cumbersome. If you have multiple assets in a living trust and you need to change the beneficiaries, you only need to make the change in the trust.
If you want to structure distributions so that beneficiaries do not receive all the assets right away at death, then a living trust is the only way to accomplish that goal. With beneficiary designations, the beneficiaries own the entirety of the assets upon the owner’s death. If a minor is named as a beneficiary and the owner dies, then costly and time-consuming court proceedings will be necessary, and the beneficiary will get the assets outright at age eighteen. If, instead, assets are held in trust, the successor trustee of the trust will be able to manage the assets for the minor according to the trust instructions without court involvement. Additionally, you can control and stagger trust distributions so that beneficiaries receive portions of the assets at certain ages or milestones and not all at once.
A trust is the only way to ensure total control of assets after death. If you have multiple beneficiaries designated on assets, then they receive their portion outright at death and are free to do as they wish. While beneficiaries might get along now, they might not in the future. When a person dies there can be final expenses that need taken care of, such as funeral expenses, medical bills, or taxes. If multiple beneficiaries are designated to receive the assets outright, how will they decide how the final expenses get paid? Since the beneficiaries own their portion outright, what if they cannot agree on sharing the costs? What if a piece of real estate is left to multiple beneficiaries and they cannot agree on what to do with it? With a living trust, you can control exactly how final expenses are to be paid with the trust assets before passing to the trust beneficiaries and how certain assets, like real property, are to be dealt with.
A living trust is a safer way to make sure you and your assets are protected in the event of incapacity. A spouse or child might have trouble accessing your funds that are in your name to pay for care and expenses if you become incapacitated or experience a medical crisis. If those assets are in a trust, a successor trustee named in the trust can step right in and access the funds without difficulty and handle all necessary expenses. Additionally, if after your death, your beneficiary becomes incapacitated and later dies, the asset will go to the beneficiary’s estate and a probate estate would be necessary.
If you have questions about beneficiary designations or living trusts, call Alex Carr Law, LLC to schedule a consultation.
