Revocable Trust as Beneficiary vs. Retitling Accounts
Adding a revocable trust to your estate plan is a common move that can simplify the management of assets during your lifetime and the distribution of assets after your death. However, when you put a trust in place, one of the most time-consuming actions is retitling assets into the name of the trust. This step often requires paperwork at banks and county offices for any real estate deed retitling. But it’s necessary because having a trust does nothing if you don’t put assets into the trust.
I’ve had several clients over the years ask if they can simply make the trust beneficiary of an account instead of going through the trouble of retitling the asset. This approach does help avoid probate and the transition of assets into the trust at death. However, there are some important differences between listing a trust as a beneficiary vs. retitling the account.
Option 1 - Listing the Trust as Beneficiary
In this approach, you designate your revocable trust as the beneficiary of specific financial accounts and real estate.
Advantages:
1. Simplicity: This method is straightforward and can often be accomplished online via a simple form.
2. Probate Avoidance: Naming the trust as a beneficiary ensures the assets bypass probate and are distributed according to the terms of the trust.
3. Flexibility: You retain personal ownership and control of the accounts during your lifetime. You can change or update the beneficiary at any point. It’s important to note that you also retain control if you retitle an account to a revocable trust.
Considerations:
No immediate trust management: Since the trust only takes effect after your death, the assets aren’t governed by the trust during your lifetime. If you become incapacitated, these assets may not be as easily managed unless you have a durable power of attorney. Even if you have a durable power of attorney, it is often much quicker for a trustee to gain access to the account than for a power of attorney.
Slower transfer after death: Following the second death, it can take a few weeks for the account to land in the trust via the beneficiary designation – until then, no one has the authority to manage the account since the account owners have died and the Powers of Attorney have ceased to have any effect.
Potential tax implications: For retirement accounts, naming the trust as beneficiary may have tax consequences, such as accelerated distributions depending on the trust’s terms. If the trust's purpose is simply ease of administration, you may prefer to list the trust beneficiaries as direct retirement account beneficiaries instead of the trust.
Option 2 - Retitling Accounts to the Trust
Retitling involves changing the legal ownership of an account so that the trust becomes the account holder. For example, a bank account titled in your name might be retitled as "[Your Name], Trustee of the [Your Trust’s Name]."
Advantages:
1. Continuous Management: Assets in the trust are governed by its terms during your lifetime and after your death, making this option ideal if you want the trust to take effect immediately in the event of incapacity.
2. Probate Avoidance: Like the beneficiary designation method, retitling assets to the trust also ensures they avoid probate.
3. Centralized Control: This approach consolidates asset management under the trust, simplifying the process for your successor trustee.
Considerations:
Administrative effort: Retitling requires notifying financial institutions and updating account titles, which can be time-consuming.
Access and reporting: You’ll still have control of the accounts, but some institutions may require additional paperwork or reporting for transactions under a trust.
Suitability for certain assets: Some accounts, such as IRAs or 401(k)s, cannot be retitled due to tax rules.
Real estate: If you have a mortgage, make sure your mortgage company is okay with a transfer to the trust, as each company has different rules on what they will allow.
Whether you list your trust as a beneficiary, retitle accounts, or use a combination of both, it’s important to review your plan regularly and adjust it as your circumstances change. For example, as you age, you may opt for retitling assets as the risk of death or disability rises. But when you are younger, you may opt for the trust as a beneficiary for its simplicity.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.