While it is very important to make sure most of your assets are "IN YOUR TRUST," there are several assets that typically don't belong "IN THE TRUST." These assets usually pass by way of a designated beneficiary.
These are usually tax-deferred accounts. Examples of assets that do NOT go into your trust are IRAs, 401k, 403b, and pension plans. These assets pass by way of “beneficiary” pursuant to contract with the particular institution. In most cases, you should name your spouse as primary beneficiary (or anyone you want if you are single) and then name your children as secondary beneficiaries (or anyone else you want if you don’t have children or wish not to include them).
If your children are too young or you have significant concerns as to how they would handle such assets, you can name your trust as secondary beneficiary (sometimes called the “contingent” beneficiary). You may want to use the specific sub-trusts designated for your children so each child’s age will govern the amount necessary to withdraw. Otherwise, the age of the oldest trust beneficiary may govern the distribution to all beneficiaries.
If you name a child directly, one important question to ask these institutions is “What happens if one of my children dies?” Some companies will give 100% to the remaining named children. Some will give that deceased child’s portion to any grandchildren (children of that child). This is known as “right of representation” or “per stirpes” (Latin). In other words, they may have an internal policy about this issue. In some cases, you may find a place on their beneficiary form where you can indicate your preference. If they don’t have any such thing on their form, ask them if you could write it in.
Some companies won’t allow you to do so, and in that case you just need to make sure you change your beneficiaries if someone was to pass away. As a general rule, naming human beings as beneficiaries of such assets is preferred to naming a trust, because naming a trust can lead to unnecessary complications and burden for the trustees. Make sure you discuss your options with your attorney and your financial/tax professionals.
If you need help creating an estate plan for your family, call our office at (661) 414-7100 to make an appointment.
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