Sebastopol Trusts & Estates Law Blog

Age is generally not a primary factor in determining whether one needs a Living Trust.

While it is obvious that an older person or couple (with a statistically shorter remaining life expectancy) needs Estate Planning, it is also appropriate for families to set up a Living Trust while their children are very young. For them, a Living Trust is the best way to ensure a safe supply of money for the support, maintenance and education of their children in case the parents die.

In fact, for families with minor children, a Living Trust makes an excellent beneficiary for Life Insurance and retirement plans when you want the proceeds to be held for your children and used for their support without a formal court supervised financial guardianship. With a Living Trust, there is much more flexibility, control, cost savings, and the final distribution to your children can be delayed until they reach an appropriate age.

In any event, procrastination is dangerous. I’ve had far too many calls from adult children whose parents are incapacitated (recent stroke, etc.) who want to know if we can now prepare a Living Trust. “I’m sorry,” I must reply, “it’s just too late…”

Any time you’ve filled out paperwork for a retirement account, annuity, or life insurance policy, you named a beneficiary. You can also name beneficiaries on bank accounts, and many investment accounts. The beneficiary is the person, people, or entity who will receive the account or policy in case of your death. Filling out the blanks on these forms may seem simple. However, the way you complete these forms can have significant tax and estate planning consequences.

Beneficiary Designation Trumps a Will. A beneficiary will receive the account or policy outright at your death. It is important to note that the beneficiary designation overrides anything that you may have written in a Will. For example, you may name one child as a beneficiary with instructions in a Will to share those funds among siblings. The instructions in the Will in this example have no effect; the child named as beneficiary is the 100% new owner of the account.

Minor Children. Another pitfall is naming minor children as beneficiaries. Someone under 18 (in California) cannot receive the funds outright. Instead, the money will end up in a potentially costly court guardianship proceeding. Consider naming a trust instead.

Name an Alternate Beneficiary. Be sure you name both a primary and contingent (alternate) beneficiary. The contingent beneficiary receives the money in the event the primary beneficiary predeceases you. I have had many instances where the primary beneficiary is deceased and we are forced to probate the account simply because there is no living named beneficiary.

Living Trust as Beneficiary? Be careful naming a living trust as a beneficiary. There are many instances where naming a trust is appropriate, such as a case where there are minor children or a disabled beneficiary. However, in many instances there are tax advantages of naming humans (as opposed to a trust) as beneficiary. This topic is complex, and you are urged to consult your tax adviser or estate planning attorney if you have questions.

A Big Mistake. Be cautious naming different beneficiaries of different accounts. I once had a situation where a mother named each of her three children as beneficiary of three different large accounts. Eventually the mother became incapacitated and needed assistance from a part time caregiver. The children (who did not get along) began to fight about “whose account” should pay for the costs. It was a sad an unfortunate situation that could have been easily avoided.

The basic message here is BE CAREFUL. Talk to your estate planning, financial and tax advisers about your beneficiary designations. A mistake can be costly.

-Ken