Benefits Of Naming Your Trust As A Beneficiary Of Your Life Insurance And Retirement Accounts

This edition of the Koldin Report E-Newsletter reviews the use of life insurance and retirement accounts to fund Trusts to accomplish your estate planning objectives.

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Quite often one of the major assets you have to provide for your spouse and children is your life insurance and retirement accounts. For many people, life insurance and retirement accounts provide the funding to meet your estate planning objectives, such as providing for a child with disabilities.

You can set up a Revocable or Irrevocable Trust which contains the terms you desire for distributions to your beneficiaries. Your life insurance and retirement accounts can then fund your Trust at the time of your death by naming your Trust as the beneficiary. Sometimes this is referred to as a “Standby Trust.”

The combination of Life Insurance/Retirement Accounts and “Standby Trusts” also allow you to accomplish your objectives without the costs and delays of Probating your Will.

Some examples of how you might want to structure distributions to beneficiaries through your Trust are as follows:

ASSET MANAGEMENT TRUST FOR MINORS:

You can fund an “Asset Management Trust” with your life insurance or retirement accounts to be used to pay for the support and education of your beneficiary (example: grandchild). Once the grandchild reaches a designated age such as 25 years old, he/she could receive the balance outright.

Another option to consider rather than a Trust is to direct that the share of any beneficiary who is under the age of Age 18 or 21 be held by a designated custodian in a Uniform Transfers to Minors Act (UTMA) account until Age 18 or 21.

SUPPORT TRUST FOR A FAMILY MEMBER:

You can fund a “Support Trust” for a family member with your life insurance or retirement accounts to be used to support and pay expenses of a family member such as an adult child.

This is often used when a child does not manage money well and would squander his/her inheritance. Such a Trust would have the Trustee be the custodian of the funds and use discretion as to when and how the funds should be spent.

INCOME FOR LIFE TRUST (Often used in 2nd Marriages):

You can fund an “Income for Life Trust” with your life insurance or retirement accounts where the beneficiary would receive all of the income earned on Trust assets, but the principal would remain in the Trust. Upon the death of the beneficiary, the balance would then go to whomever you have designated.

This type of Trust is often used in a second marriage situation where you want to provide for your spouse, but on his/her death, the balance would then go to your children.

SUPPLEMENTAL NEEDS TRUST FOR CHILD WITH DISABILITIES:

You can fund a Supplemental Needs Trust with your life insurance or retirement accounts. If you have a child (or grandchild) with disabilities who is receiving government benefits, you can leave your assets in a Trust for your child which would be used to supplement the government benefits but not replace those benefits.

Such a Trust, if written properly, would not be deemed to be an asset of your child and therefore would not cause your child to lose government benefits. You can provide for your child with disabilities during his/her lifetime and then provide that any remaining balance after his/her death would go to remainder beneficiaries that you have designated.

COMPLEX MULTIPLE BENEFICIARIES:

If you desire to leave certain percentages to charities, a certain dollar amount to a friend, and specific amounts to family members, this can be difficult to accomplish through a beneficiary form on life insurance or retirement accounts.

However, if a Trust is designated as the beneficiary, the proceeds from life insurance or retirement accounts would be deposited into a Trust account and then distributed pursuant to the directives of the beneficiary clause of the Trust.

DYNASTY TRUST:

Oftentimes children have Wills which leave everything to their spouses. This usually means that any inheritance they receive from you that is not spent would then go to your children’s spouses instead of to your grandchildren.

One method to override your children’s Wills is to leave their inheritance from your estate, from your life insurance and/or from your retirement accounts in a “Dynasty Trust.”

Under this type of Trust, the inheritance left to your children is available for them to use and enjoy, but on their deaths, the remaining balance would be left under the terms of the Trust to whoever you designate such as to your grandchildren.

DISCUSS WITH YOUR ACCOUNTANT AND/OR FINANCIAL PLANNER

Before changing the beneficiary designation of your retirement accounts and life insurance, you should always provide your accountant and/or financial planner with a copy of your Trust and review the tax consequences of leaving your retirement accounts and life insurance to the Trust as compared to leaving them directly to your named beneficiaries free of Trust.

For more information about Trusts, please see our website by clicking here.

At the Koldin Law Center, P.C., located in East Syracuse, New York, we have over 50 years of experience helping individuals plan for immediate crisis and long term care. Our attorneys are available to discuss your estate planning options, including the advantages and disadvantages of Revocable Trusts and Irrevocable Trusts, along with other estate planning considerations including a Will, Power of Attorney, and Health Care Proxy. We do not charge a fee for the initial consultation. We welcome your children, family attorney, accountant, and/or financial planner to be present at the initial consultation.

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