Wills govern probate assets. Trusts govern trust assets. Beneficiary designations govern retirement accounts, life insurance and annuities.
Different things govern different assets. That is why it is crucial that professional guidance be obtained to make sure all your designations and assets are properly titled or designated in order to work with your plan.
For instance, just recently we were helping a couple who wanted to make sure that one of their children inherited her share in a trust that was controlled by her brother to protect her from her own wasteful spending. Some of the assets were life insurance and retirement accounts.
I explained that the spouse would be primary beneficiary but that the contingent beneficiary should be the trust. They told me the designations are all in place. “Why do we need to change anything there?” they asked me.
I told them that if the beneficiary designation controlled and the contingent beneficiary went directly to the daughter, then they would both go into her trust. As a result, their goals would be frustrated. She would have total control, and the protection they wanted to give her (from herself) was lost.
This shows how important it is that beneficiary designations be looked at closely to make sure they accomplish stated goals.
When an IRA or other retirement assets are going to go into a trust for a loved one, we need to make sure it is designated properly.
Also, we need to make sure that the counselor is mindful of income tax considerations so the beneficiary will be able to do a non-spousal rollover relative to the IRA that might be going into a trust for their benefit.
This is a sensitive area of the law and the trust and designations need to be carefully drawn so as to preserve income tax deferral for the beneficiary.
Not long ago, the United States Supreme Court held that if someone inherits an IRA free of trust, then those assets are NOT protected from lawsuits. However, as a matter of law, if an IRA goes into a trust and the trust is drawn properly, then the assets can be protected from most lawsuits, and income tax deferral also can be achieved, so required minimum distributions can come out over the beneficiary’s life expectancy.
The moral of the story is that a well-drafted estate plan can fail if beneficiary designations and asset titling are not properly co-coordinated with the plan. These matters should be looked at closely in every case.
As always, a little bit of planning can make a big difference.
Mark F. Winn, J.D., Master of Laws (LL.M.) in estate planning, is a local asset protection, estate and elder law planning attorney. www.mwinnesq.com