What do I need to know about Beneficiaries?

Clients often don’t understand what sort of property their will or trust controls.  In other words, if I have an IRA and leave everything to my wife through my living trust, does the trust control where my IRA money goes? What about life insurance policies? My house if it is in joint title with my spouse?

The thing to understand about property is that for estate planning purposes there are generally two types of property:  probate property and non-probate property.  The idea behind putting property into a trust is usually to avoid the probate process all together.  Once title has been changed on the asset itself (not just listing it in the trust “schedule of assets”) then it should follow the trust distribution and not be subject to probate.

IRAs, most annuities, and life insurance are assets that can and will bypass probate on their own without being owned by a trust because they have beneficiary designations built into the policy or account. In almost every case you cannot and do not want to put your IRA into the name of your trust. These types of assets will bypass probate by virtue of having a mechanism to pass the asset on without the probate process.  However, it is still very important when doing your estate planning to review beneficiary designations in light of what your wishes are now compared to what they were when you started the account or bought the life insurance policy.

Also, paying attention to the manner in which title is held on an account or piece of real estate is very important.  Some bank and investment accounts can have “pay on death” titles where a beneficiary is allowed and these too will bypass probate and would not be controlled by a client’s will, for example, and would be paid out to the beneficiary listed on the account instead.

Joint title is typically also an area where people get confused.  If the title on a bank or investment account for two people is “joint tenants with rights of survivorship” then the other joint tenant will automatically receive 100% ownership upon the first death of the a joint tenant. This is true for a piece of real estate owned jointly as well.

You need to make sure that the title of an account or piece of real estate that you want your trust to control is in the name of your trust. Otherwise, the surviving joint tenant receives 100% of the property and if something happens to both joint tenants simultaneously, then you typically will have a probate asset at that point.

While not always the case, there may be times when you want to name your living trust as a beneficiary of one of these accounts or policies instead of naming people individually. Those cases vary by individual situation, but the important thing to recall is that naming the trust as a beneficiary of a contract or policy is different from changing the title (ownership) of the asset into the name of the trust.

It is good housekeeping to review your beneficiary designations every few years and especially at times of life changes (births, deaths, divorce, remarriages, major change in financial situation). Also review the title on real estate that you may have purchase since you created your living trust, or real estate that you have refinanced—just to be sure that the title is held correctly in accordance with your overall estate plan.