Common Trust Beneficiary Mistakes
When creating a trust, you have to name your beneficiaries. In many cases, these are going to include your spouse, children, grandchildren, and in some cases, great-grandchildren. As the children named in your trust get older, you should think about amending your trust to ensure each child’s specific needs are reflected. You also need to review the information in your trust to figure out when your beneficiaries are going to receive the inheritance you are leaving them. In some cases, you may wait to give your children large sums of money until they have reached a specific age, or until they have achieved career or educational milestones. It’s a good idea to review all of your estate planning documents from time to time to ensure individuals you have appointed as guardians for your minor children or any children you have with special needs are still appropriate and are still willing to take on the huge responsibility. When carrying out the terms of your trust, your trustee may be required to defer payments to your beneficiaries. If you are selecting a family member, be sure to choose wisely. After all, there are certain situations that may create tension in a relationship that otherwise loves. In some cases, you may want to think about hiring a trusted non-family member or even a corporate trustee.
The Most Common Mistakes to Avoid When Creating a Trust
While setting up a trust may seem somewhat daunting, it doesn’t have to be. Knowing the top mistakes that are made when doing this can help ensure you avoid them and minimize the stress and hassle related to this situation.
The most common mistakes include:
• Not reviewing and updating your trust on a regular basis
• Not funding your trust
• Making a bad choice when appointing the trustee
• Not specifying who the beneficiaries are
• Not providing clear instructions for your trust
• If you have a 401K, an IRA or a life insurance policy, you’ve named a beneficiary on a beneficiary designation form. These forms matter as they control who receives some of your most valuable assets regardless of your current family makeup or the intent expressed in your Will or Trust.
Life changes quickly and before you know it outdated beneficiary designation forms fail to consider a spouse or child, or could pass assets to someone too irresponsible to manage an inheritance. It is wise to review your beneficiary designations every few years or after any significant life event (marriage, divorce or the birth of a child or death of a loved one, for example). A regular review allows you to decide whether a different distribution of your assets makes sense and also uncovers the rare, but possible, loss of a beneficiary designation form by the company in control of your financial asset.
Mistake – Not Naming a Contingent Beneficiary
If your primary beneficiary predeceases you and you haven’t named a contingent beneficiary, the probate court will likely have to determine who should receive the benefits in accordance with your Will or Trust or your state’s default inheritance plan. Naming a contingent beneficiary prevents the unnecessary costs, delay and stress of probate and ensures you control who receives your assets. It also gives your primary beneficiary the flexibility to refuse or disclaim an unneeded inheritance if it’s a smart tax move to instead let it pass to a child or other named contingent beneficiary.
Mistake – Naming Your Estate as Beneficiary
Naming your estate as beneficiary doesn’t mean your executor of your Will or trustee of your Trust has immediate control to distribute your assets to your beneficiaries. Instead, your loved ones will need to initiate the probate process to determine who should receive the inheritance in accordance with your Will or Trust or your state’s default inheritance plan if you haven’t prepared either estate document. You can avoid the unnecessary costs, delay and stress of probate and ensure you control who receives your assets by naming the appropriate beneficiaries with help from your estate attorney.
Naming a Minor Child as Beneficiary
While no one may stop you from naming a minor on a beneficiary designation form, the financial institution cannot pay benefits directly to a minor, which means a custodian or conservator will need to be appointed by the court to manage the inheritance until the beneficiary reaches age 18 or 21, depending on state law. To avoid these unnecessary legal and administrative expenses ask your estate attorney whether you should establish a trust for the minor’s benefit or designate that the minor to benefit subject to your state’s Uniform Transfers to Minors Act.
Mistake – Naming One Child Expecting that Child to Share the Inheritance
Often one child is more financially responsible than others, but a child may face negative income or gift tax consequences in making a gift of the inheritance to others and is under no legal obligation to share the benefits. Ask your attorney how to appropriately name your children as co-beneficiaries or to create a Trust to benefit any child that is not financially able to manage an inheritance, or designate a minor inherit subject to your state’s Uniform Transfers to Minors Act.
Mistake – Naming Young or Financially Irresponsible Beneficiaries
If naming a beneficiary to receive assets outright is unwise, your attorney can create a Trust specifically designed to manage the assets for the beneficiary and put some limits on how the assets will be used (e.g., provide for health, education and support with outright control at a certain age where advisable). Just avoid naming an existing trust as beneficiary without getting advice from your attorney to be sure the terms of the Trust make sense today and that naming the Trust as beneficiary won’t have unintended tax consequences, as described in the next paragraph.
Mistake – Naming a Trust Beneficiary without Specific Instructions from your Estate Attorney
Before naming an existing Trust as beneficiary on any beneficiary designation form, ensure the terms of the Trust make sense for that beneficiary and that doing so won’t have unintended tax consequences. IRAs, 401Ks and other qualified retirement plans allow for the valuable tax-deferred growth of the asset over a beneficiary’s life expectancy, however, most Trusts are not drafted to allow for continued tax-deferral. That means naming a Trust as beneficiary typically causes all the retirement plan assets to become income taxable within five years. If you want a Trust to control how your retirement assets are received by minor beneficiaries or beneficiaries needing some management or distribution assistance, ask your attorney for a designated beneficiary Trust to accomplish these goals without negative tax consequences.
Mistake – Naming Anyone other than Your Spouse as a Retirement Plan Primary Beneficiary
Federal and State law place restrictions on a married individual from naming someone other than his or her spouse as the primary beneficiary. While it may be possible for your spouse to consent to your naming of another, state laws also come into play so be sure to seek guidance from an attorney.
Mistake – Naming a Beneficiary with Special Needs
It is common to name someone with special needs as a beneficiary on a beneficiary designation form without realizing that doing so may disqualify the individual from receiving governmental assistance such as Supplemental Security Income (SSI) or medical benefits. Be sure to speak with your attorney to determine whether it’s wise to name a special needs Trust as beneficiary to allow benefits to pass to your loved one without jeopardizing his or her access to governmental benefits.
Advice to Trustees: Get Along With Beneficiaries
A trustee’s job easier is made easier by a friendly relationship with beneficiaries. When you’ve been chosen to act as the trustee of a trust, you must handle both money and people. You might be more worried about the financial part, but the people may prove to be the greater challenge. Your job as trustee will be infinitely easier (and you’ll be far more effective) if, right from the start, you have cordial dealings with the trust beneficiaries; the people who benefit from the trust money.
Communicate Well and Often With Beneficiaries
Most beneficiaries are unfamiliar with the trust administration process and anxious about their lack of control. This combination is the perfect recipe for fear and paranoia. You may be doing everything right from a technical standpoint, but if the beneficiaries don’t know what you’re doing or why you’re doing it you’re not likely to get their cooperation or support. And, without it, your job is likely to take longer and be more difficult than it needs to be.
The best way to relieve beneficiaries’ concerns is to:
• get in touch with the beneficiaries early
• educate them about your role
• help them to form realistic expectations of how long it will take to administer the trust
• treat their questions as opportunities to engage them (rather than as annoying intrusions), and
• don’t hide the trust document or assets from them.
You are required (by law) to keep beneficiaries reasonably informed about how trust assets are being managed. Some states require you to send specific kinds of notices and information to the beneficiaries on a regular basis. Think of these requirements as the minimum you should do. You’ll do better if you exceed these requirements and make sure that all the beneficiaries know exactly what the trust owns and what you’re doing with the assets. The more transparency there is during a trust administration, the happier the beneficiaries should be.
Get in Touch Early With Beneficiaries
If the beneficiaries all live nearby, a good way to start might be to call a family meeting and sit down together to go over the process of trust administration. You can answer beneficiaries’ basic questions about the trust and its terms and give them an overview of what must happen before you can hand over the trust assets to them. Limit the scope of the meeting to a discussion of what the trust instrument says and how trust administration works. The attorney who’s helping you in your role as trustee can also be at that first meeting (for more about whether you should hire an attorney. The attorney can answer questions about the trust and your responsibilities. But beneficiaries need to understand that the lawyer is there to represent you in your capacity as trustee and that the attorney cannot give the beneficiaries legal advice. Unhappy beneficiaries can get their own attorneys to help them advocate for them in the trust administration process; though if you keep them informed and engaged, they shouldn’t need to. If a face-to-face gathering isn’t practical, send each beneficiary a letter to notify them that you are the trustee, give your contact information, and provide an overview of the trust administration process. This letter should be in addition to whatever notices your state law requires.
Stay in Touch With Beneficiaries
Whenever you take an action as trustee or discover information that affects the beneficiaries, be sure to let the beneficiaries know about it. You have a legal duty to give the beneficiaries information that they might need to protect their interests. You’ll be providing regular written reports (called “accountings”) that detail all financial transactions, but it’s a good idea to keep informal lines of communication open, too. A short email that tells the beneficiaries that you’ve gotten an offer on some trust real estate you want to sell or the troubles you’ve been having with liquidating a brokerage account will let the beneficiaries know what’s happening and that you’re keeping them in mind.
Show Beneficiaries the Trust Terms
In some states, beneficiaries have the right to see a copy of the trust document itself. In other states, beneficiaries don’t have a legal right to see the whole trust instrument, so if you wish, you can give them only enough information for them to safeguard their interests. You might decide to disclose only the provisions that apply directly to a particular beneficiary. In many cases, such as when all siblings are receiving an equal share of the trust it may make sense to give each one a full copy of the trust instrument itself, even if it’s not required by state law. But in some situations, sharing the whole trust document with all the beneficiaries can trigger bad feelings. If one beneficiary’s share is being kept in a trust because of that beneficiary’s past inability to manage money, or if one beneficiary is receiving more than others, you might not want to offer the entire trust instrument. You can provide it if a beneficiary asks you for it.
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