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Naming a Trust as Beneficiary

March 06, 2023

Trusts have become very popular tools to facilitate the distribution of assets to your beneficiaries. A few great reasons to use a trust for estate planning are: 

  1. If your beneficiary is a minor. Assets could be held in trust for the benefit of the minor until they reach the age of majority and may be more competent to manage the funds. 
  2. Second Marriages. A trust can be used to provide for your surviving second spouse and if drafted correctly, leave the remainder of the accounts to your children, without your second spouse being able to change the ultimate beneficiary. 
  3. Limiting a Beneficiary's Access. If you're concerned about your children receiving a large inheritance and blowing the money like they just hit the jackpot, a trust can distribute the inheritance over a longer period of time. Or even prevent distributions by the trustee if they think the beneficiary may have a drug or gambling problem. 
  4. A Trust may offer Creditor Protection. If your beneficiary is exposed to liability, by limiting access to the trust funds, a properly structured trust would not be considered an asset of the beneficiary and may afford credit protection for them. 
  5. Protection from Divorce. Normally assets received during a marriage could be considered assets of the marriage and subject to equitable distribution in the event of divorce. By limiting access to the funds, this strategy may provide protection for your child in the event they get divorced. 
  6. Payouts can be controlled over a long period of time. Whether your intention is to leave money to your children or a charity, you can dictate how your estate will be paid out and have more control over the distribution and provide a legacy for many years to come.

          These are examples of very useful reasons to have a trust. However, did you know that trusts that can accumulate assets (accumulation trusts) pay their own taxes? For 2023, income accumulated in trust is quickly shot up into the 24% tax bracket, after only $2,900 of ordinary income and after just $14,450 of income the trust would pay tax at the 37% tax rate! That probably is much higher than the beneficiaries would have to pay. 

          This would not be true for a trust that simply distributes the assets immediately to the beneficiaries. Normally the beneficiaries would be responsible for paying tax when they receive the money. Under the SECURE ACT, IRA's now have to be liquidated and taxes paid within 10 years. If you were to name your trust as the primary beneficiary, the trustee may not be able to stretch those payments out, unless there is a specific language in the trust naming an "Eligible Designated Beneficiary". 

          It's always a good idea to review your estate planning documents with your attorney, every few years, to make sure your wishes will be carried out and no pitfalls exist that could have adverse consequences to your beneficiaries.