There are many reasons to use a trust to avoid probate rather than simple beneficiary designations. I often use them if the beneficiaries are minors or need someone else to control the money. Trusts can also be used to simplify real estate or just have one person in charge when someone passes. But recently, I’ve encountered a few clients where I’m recommending a trust for another reason: multiple beneficiaries on different assets.
If you have one person as a beneficiary on your retirement money, another on your life insurance, and another on your investment accounts there can be problems.
First, you aren’t guaranteeing any of these beneficiaries money, let along a specific amount of money. For instance, if you are 65, most of your money probably is in your retirement account. So, you may think that beneficiary would be getting a substantial amount of money. However, if you live another twenty years, that money will transition slowly from your retirement account to other assets, such as your investment account. As this happens, if that investment beneficiary is different than your retirement beneficiary, your investment beneficiary may be getting much more than you originally planned and the retirement beneficiary may get much less.
And that is if you’re in charge of the money. If you think of it, you may be able to adjust beneficiaries to account for that discrepancy. But think of how much worse it is if by the time this is happening, you’re no longer capable and your power of attorney is making decisions for you.
In that case, your power of attorney must think about where to pull money to pay bills and expenses. If they don’t know or don’t understand the nuances of what beneficiary is on which account and how much you would like that beneficiary to get, there is no way they can follow through on your plan. This means they would really just be figuring out the best way to take care of you. Then, unknowingly, they could be pulling money from an account and a beneficiary you don’t want them to touch!
Or the asset listing a beneficiary may not even exist by the time you pass. A life insurance policy may lapse, or a home may be sold. If those were the only assets designated to a beneficiary, then the beneficiary would end up with nothing.
A much simpler way to provide for multiple beneficiaries, would be a trust. Within a trust you can turn the amounts you want beneficiaries receive into percentages. This ensures that any money left will be divided amongst all your loved ones and no one will be accidentally disinherited.
In addition, a trust would allow someone you trust to focus on the best financial decision for you without having to worry about beneficiaries. This would allow them to make better decisions and save them the worry of a beneficiary suing them for pulling money from an account that benefited the beneficiary.
Trusts have many other benefits as well, but with complicated plans, like multiple beneficiaries, a trust can make things a lot more simple.