Making the Beneficiary Designation of Certain Assets as the Living Trust Itself – When Does this Accomplish Your Goals and When Does this Elude Them?

July 31, 2020

A living trust is a legal document created during a person’s lifetime where a trustee manages the assets that fund said trust for the benefit of the named beneficiaries who receive the assets at the grantor’s death or at some other designated time/event per the terms of the trust.

The living trust can be revocable or irrevocable but it must be created while the grantor is alive. A living trust itself can be named as the beneficiary of certain assets such as 401(k)s, IRAs, life insurance policies and Payable-On-Death bank/investment accounts. This occurs when the grantor lists the living trust on the beneficiary designation form for any of these types of assets. When the grantor dies, the asset is then placed in the living trust.

Deciding whether or not to make the living trust the beneficiary of these types of assets depends on the goals of the trust’s grantor. Changing the beneficiary designations of these assets may not serve the intended purpose. If the trust will continue beyond the death of the grantor and is intended for on-going support and maintenance of the beneficiaries, then it makes sense to funnel these assets into the living trust for those stated purposes.

On the other hand, if the trust will dissolve upon the grantor’s death and the assets then distributed outright to beneficiaries, it may create another unnecessary layer and cause some delay in distribution.

Beware of changing the ownership of these assets (rather than the beneficiary designation) to the living trust. This could give unintended powers to the trustee over those assets. For example, if you change the ownership of a life insurance policy to the living trust, you may be giving the trustee, and any successor trustees, the authority to borrow against the cash value of the policy. Note this is not the same as making the living trust the beneficiary of the life insurance policy. That will not convey these types of powers to the trustee because the trust does not get funded with the asset until the grantor dies.

For more information on creating and funding a living trust and determining how to assign assets related to the trust, contact the experienced estate planning attorneys at Stouffer Legal at 443-470-3599.

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